The ImpactAssets Handbook for Investors: Generating Social and Environmental Value through Capital Investing

By Anthem Press

In recent years growing numbers of investors have been joining the community interested in not only generating financial returns but also creating positive social and environmental value in the world. “The ImpactAssets Handbook for Investors” offers an introductory overview for those interested in investing their capital in a sustainable, responsible and impactful manner.

The handbook offers insights and approaches to developing strategy as well as an understanding of the issues and considerations of impact investors in practice. In addition to discussions of portfolio structure and strategy, the handbook offers an overview of due diligence necessary to assess potential investments, a discussion of communications and performance measurement issues and other factors key to managing capital for multiple returns.

With contributions from some of the field’s leading experts in impact investing, “The ImpactAssets Handbook for Investors” will provide the reader with both broad advice and specific guidance on how to become best positioned to engage in impact investing as an asset owner, both large and small. While not an “answer book,” the handbook offers practical insights and presents critical questions every investor should consider in creating an investment strategy and executing the deployment of investment capital.

• Language: English
• Publisher: Anthem Press
• Release date: Oct 3, 2017
• ISBN: 9781783087310

Book preview

The ImpactAssets Handbook for Investors

The ImpactAssets Handbook for Investors

Generating Social and Environmental Value through Capital Investing

Edited by

Jed Emerson

Anthem Press

An imprint of Wimbledon Publishing Company

www.anthempress.com

This edition first published in UK and USA 2019

by ANTHEM PRESS

75–76 Blackfriars Road, London SE1 8HA, UK

or PO Box 9779, London SW19 7ZG, UK

and

244 Madison Ave #116, New York, NY 10016, USA

First published in the UK and USA by Anthem Press 2017

© 2019 Jed Emerson editorial matter and selection; individual chapters © individual contributors

The moral right of the authors has been asserted.

All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book.

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

ISBN-13: 978-1-78308-861-4 (Pbk)

ISBN-10: 1-78308-861-3 (Pbk)

This title is also available as an e-book.

We would like to dedicate this book to all those social entrepreneurs and impact investors around the world who have spent their lives creating the knowledge and experience we each now build upon.

While many entering the field of impact investing mistakenly believe it to be new or untested, in truth there are many who have paved the path upon which those coming to the practice now walk.

We thank you for your good efforts, for taking early risks to pioneer best practices in impact investing and for teaching us there is more to investing capital well than simply making money.

Contents

List of Contributors

Preface

Introduction

Jed Emerson

1Construction of an Impact Portfolio: Total Portfolio Management for Multiple Returns

Jed Emerson and Lindsay Smalling

2Total Portfolio Management: One Practitioner’s Approach

Matthew Weatherly-White

Case Study 1

3Seed Stage Investing: High Impact, But Not for the Faint of Heart

Tim Freundlich, Jed Emerson and Lindsay Smalling

4Choosing Your Impact Investment Advisor

Brad Harrison and Stephanie Cohn-Rupp

Case Study 2

5Targeted Impact: Donor-Advised Funds and Impact Investing

Jointly authored by senior staff of ImpactAssets, RSF Social Finance and Tides Network

6Transformational Giving: Philanthropy as an Investment in Change

Kris Putnam-Walkerly

7Assessing Your Opportunities: The Challenge and Key Practices of Engaging in Investor Due Diligence

Sandra Osborne

Case Study 3

8The Measurement Challenge

Sara Olsen

9Communicating Impact: Frameworks for Messaging

Amy Hartzler

10A Journey to Impact: Initial Steps toward Impact Investing

Jennifer Kenning

Case Study 4

11Getting to Impact

Jed Emerson

12Concluding Thoughts on Mobilizing for Impact

Jed Emerson and Tim Freundlich

Appendix: Impact Investing Resources

Notes on Contributors

Index

Contributors

Jed Emerson

Senior Fellow, ImpactAssets

Edition Editor

Tim Freundlich

President, ImpactAssets

Brad Harrison

Managing Director, Tiedemann Advisors

Amy Hartzler

Founder, Do Good Better

Jennifer Kenning

Co-founder, Align

Sara Olsen

Founder, SVT Group

Sandra Osborne

Investments Director, ImpactAssets

Kris Putnam-Walkerly

Founder, Putnam Consulting Group

Stephanie Cohn-Rupp

Investments Director, ImpactAssets

Lindsay Smalling

Producer Curator, SOCAP

Matthew Weatherly-White

Partner, The CAPROCK Group

Preface

A handbook is a tool, like an implement with which to dig into the dirt, a hoe with a rough-hewn handle one uses to work the soil, to remove the rocks and to till the ground, breaking up clods of earth, moving it into rows, and opening up new areas for seed and eventual, future growth.

A handbook may also serve as a compass, offering readers an orientation toward the North and helping position themselves in alignment with the forests, mountains and rivers to be entered, crossed and summited. But a handbook is neither a bible nor a book of wisdom to be reflected upon as much as a set of guidelines and guidance for the traveler.¹

Progress on the Fundamentals

In the brief two years since the publication of the first edition of The ImpactAssets Handbook for Investors, little has changed in the field of impact investing and everything has changed. The field continues to grow, newcomers continue to launch new products, funds and investment firms, and capital continues to flow into the field, seeking impact—but also seeking financial returns and diversified approaches to placing capital in pursuit of doing well while doing good. These newcomers bring fresh energy and new passions, just as they bring a lack of awareness of the past or sense of progress made to date. Indeed, many of the issues and themes impact investors were debating three years ago when we first began assembling this volume continue to be explored, with progress being made on a number of important fronts.

The Global Impact Investing Network (known as the GIIN) has now published its four Characteristics of Impact Investing.² These include the ideas that impact investors:

• Intentionally contribute to positive social and environmental impact.

• Use evidence and impact data in investment design.

• Manage impact performance.

• Contribute to the growth of impact investing.

These characteristics are important because they assert a fundamental set of concepts behind which all impact investors should gather, promote and hold themselves accountable. Furthermore, they are central concepts that those seeking impact investment opportunities may use to engage with firms, funds and investment instruments by asking,

Does this investment intentionally contribute positive social and environmental impact? If so, how exactly is that impact achieved?

Is evidence and impact data being used to create the investment vehicle?

Are the managers of capital attempting to oversee and govern the practices of the investment in order to optimize impact performance?

And how does this firm contribute broadly to the growth of the field I would like to place my capital within?

These are simple ideas, and yet those seeking to engage in impact investing must answer these important questions if they are to stay on track, identifying investments that offer more than simple financial returns alone.

The tricky part, of course, is that in many ways, there is not a single clear-cut answer to these questions; correct responses may well differ based on the asset class, type of strategy and capacities of the investment under consideration. If those claiming to march under the banner of impact are not able to thoughtfully and with depth respond to these questions, potential investors should be wary and consider whether the proposed investment is actually worth entrusting capital to.

In addition to the continuing good work of the GIIN, the World Bank’s International Finance Corporation, known as the IFC, recently released its own set of guidelines, called the Operating Principles for Impact Management.³ These include the following:

1. Define strategic impact objective(s), consistent with the investment strategy.

2. Manage strategic impact on a portfolio basis.

3. Establish the manager’s contribution to the achievement of impact.

4. Assess the expected impact of each investment, based on a systematic approach.

5. Assess, address, monitor and manage potential negative impacts of each investment.

6. Monitor the progress of each investment in achieving impact against expectations and respond appropriately.

7. Conduct exits considering the effect on sustained impact.

8. Review, document and improve decisions and processes based on the achievement of impact and lessons learned.

9. Publicly disclose alignment with the principles and provide regular independent verification of the alignment.

We’re pleased to say that the first and second chapters of this volume explore principle number two in depth, presenting the overall strategy of constructing an impact portfolio as well as reflections from a leading impact investor regarding considerations in doing so. Other chapters in this volume explore issues of due diligence, monitoring and metrics.

The IFC impact investing principles are important in that firms are now being asked to commit themselves to operating within the impact investing marketplace in accordance to these principles. But, again, while the principles were launched with some fanfare and the endorsement of a number of leading, mainstream investment firms, the process of promoting and then adhering to these principles is not as simple as a firm’s signing a piece of paper and committing to put the principles into practice. One must ask, among a variety of related question, How do they apply these principles in practice? How easy is it for potential investors to assess their advancement of these principles? These principles and the GIIN’s core characteristics are important in that they offer guidelines to institutions seeking to offer impact investing products to the field of impact investors—and they offer impact investors reference points not only for their investment decisions but for the development of their overall strategies as well.

Core characteristics, principles and standards are even more important in that they will be one more tool (in addition to the platform of metrics offered by IRIS Plus and related initiatives) you may use to advance your own good efforts—to assess actors, to understand differences between firms and opportunities and to have the best chance of deploying your capital for financial performance at various levels together with the generation of positive impact in a world so desperate for it.

In addition to the good work of the GIIN and IFC, since the publication of this volume’s first edition, a new entity has introduced other resources for the impact investor. Assembled under the banner of Global Steering Group for Impact Investing,⁴ which was born from a G-7 committee and at present has representation from 21 countries as well as the European Union, the GSGII has convened a special Impact Working Group that, as of this writing, is developing a book on the rise of the Impact Economy which consists of reflections of some of the world’s leading practitioners (a group that, through some obvious oversight, this author was invited to join!). The GSGII’s book will be released in November 2019, together with a companion compilation of reflections on impact investing to be released by the British Council. These two publications promise to offer impact investors expanded vision and perspective on the future of the field.

These publications join a number of new online platforms that seek to offer impact investors support in defining the emerging language and practices of the field. For example, the Impact Terms Project aggregates definitions, framing documents and a number of other tools to assist impact investors in sharpening their approach to the field, and is worth every impact investor’s exploration.⁵

These and a host of other resources represent part of a new generation of thinking and practice that has continued to advance in the brief time since the original publication of The ImpactAssets Investor Handbook in 2017. This growing body of knowledge is one all impact investors should avail themselves of and again points to the reality that while it may be hard for those entering this space for the first time to learn everything, there is a growing body of resources available to assist you in your journey!

Trends and Trajectories

In addition to the continuing rollout of new resources and perspectives on impact investing, one may at this point also identify various trends that appear to be emerging within the impact investing arena. Devin Thorpe, Forbes contributor and educator, recently offered 18 trends—though we won’t recount each of them here!⁶ And the wealth management and advisory services firm Glenmede identified the top five impact investing trends for 2019 as including the following: conducting climate change scenario analysis, promoting diversity and inclusion, reducing plastics pollution, combatting water stress and advocating for affordable housing.⁷

While these are each good and interesting lists to inform our understanding of the current state of play within impact investing, from our perspective, among this growing number of important issues for consideration by impact investors, there are two trends in particular deserving of our attention.

First is that use of philanthropic investment capital—which we may understand as often being passion-based, thematically oriented and not requiring a direct financial return aside from the financial value of a tax deduction—is on the rise for impact investors. This risk-tolerant, catalytic capital is and always has been critical for the financing of early-stage impact investments. Whether it is climate change, poverty eradication, water and sanitation, or many other goals reflected in the UN-SDGs and elsewhere, there is growing awareness that investment capital in philanthropic endowments—and particularly donor-advised funds—needs to move rapidly and fully to impact investing, rather than be parked in the stock market generating returns that are neutral to negative on the impact scale.

This trend is illustrated by the growth ImpactAssets’ Custom Investments, which in 2019 saw a record 108 Custom Investments totaling $17.34 million in private mission-driven businesses, impact funds and nonprofit organizations. Since 2011, ImpactAssets donor advisors have sourced and recommended $85.44 million in 589 direct investments at roughly $150,000 per deal. And we are simply one firm now active in this important segment of the market. For those looking to connect with a network promoting some of the best-case examples and resources in this area, please see the Mission Investors Exchange for more.⁸

The second trend we have seen at ImpactAssets has to do with gender equity: namely, the fact that ever-increasing amounts of capital are being directed to women via a number of impact investing strategies. Impact investing drives more capital of various types to female founders than traditional venture capital (VC). And women make up larger percentages of impact investing asset management teams than is found within traditional asset management. Impact investing organizations such as ImpactAssets have funneled VC to organizations led by women. As of year-end 2018, women founders or CEOs led 39 percent of funds and ventures funded by ImpactAssets. Women founders made up just 2.2 percent of funding by traditional VCs.

Similarly, there is a significantly higher percentage of asset managers who are women within impact investing. The ImpactAssets 50 (IA-50, a publicly available, online database of private capital fund managers who deliver social and environmental impact as well as financial returns) notes that nearly 9 in 10 (86 percent) IA-50 managers have teams of investment professionals where 25 percent or more are women and/or from under-represented groups, while half of the firms in the list have teams with 50 percent or more women and other underrepresented groups, again a significantly higher percentage than investment industry averages.

Future Forward

As we look to the future of impact investing, we might anticipate yet additional growth in the amount of capital deployed for impact; at the same time, we will no doubt see continued growth in our knowledge and understanding of what it means to invest for impact and what it takes to effectively do so.

That said, we’re also seeing the bar raised in terms of what it is that impact investing is supposed to be about. While for some it will continue to be a large tent with diverse actors operating under various understandings of impact, for others the definition of impact will be raised together with our expectations of what it is we seek to achieve. Increasingly, it will not be enough to simply avoid contributing to climate change and economic injustice via our investments. Rather, we will seek to have more meaningful and direct impact directly upon those issues we claim to care about as we see continued decline in the environment and challenges to advance sustained economic equity and social justice.

If we are to attain our goals, our actual impact must exceed our ambition and rhetoric. To do anything less will certainly give fodder to those who criticize or doubt what impact investing may achieve. But of greater importance than the challenges of critics is that we as a field continue to advance toward our goals and realize our diverse ambitions. Even if we ultimately fall short of those goals, as Mahatma Gandhi said, Whatever you do will be insignificant, but it is very important that you do it!⁹

Our individual dollars may be modest or substantial, but regardless, each of us must continue investing, exploring and changing capital’s potential to serve as a tool by which we might transform our world.

Jed Emerson

Granby, Colorado

Notes

1 For reflections and connections of impact investing with wisdom literature, please see The Purpose of Capital: Elements of Impact, Financial Flows and Natural Being , free e-books of which are available at www.purposeofcapital.org .

2 https://thegiin.org/assets/Core%20Characteristics_webfile.pdf .

3 https://www.ifc.org/wps/wcm/connect/53ab38e8-5655-48d9-86ec-0b4df55ae3f4/Impact+Investing_Principles_FINAL_3-6-19.pdf?MOD= AJPERES .

4 www.gsgii.org .

5 https://www.impactterms.org/our-mission/ .

6 You may find them detailed here in his original article, published on the Forbes site: https://www.forbes.com/sites/devinthorpe/2018/07/30/18-impact-investing-trends-you-havent-seen-before-and-1-you-have/#729c23833e36 .

7 https://www.glenmede.com/our-ideas/top-5-impact-investing-trends- for-2019 .

8 https://missioninvestors.org/ .

9 https://www.goodreads.com/quotes/17453-whatever-you-do-will-be-insignificant-but-it-is-very .

Introduction

Jed Emerson

Your picking up this book is a reflection of the fact that while we all may acknowledge many of the incredible, positive effects finance and capital have had upon our world—lifting millions out of poverty, bringing electricity (increasingly solar generated) into formerly dark places and improving housing options for great numbers of people—the reality is many of our planet’s most critical challenges remain. Accessible primary health care and secondary education are beyond reach for many, affordable housing is an issue in both developed and developing nations and the diverse effects of climate change are now making their presence felt around the globe. These are not issues government or nonprofits can address alone. While the role of philanthropy and public funding will continue to be key, the reality is you cannot donate your way out of poverty or back to a green planet. There is a direct and meaningful role to be played by business in working with other sectors to drive positive change in our world. And whether we’re talking about mission-driven for-profits or nonprofit social enterprise, the fuel of business is capital.

Traditional, mainstream investing has been built on the belief that investing and consideration of social or environmental issues are two distinct worlds—and that if you include considerations of social or environmental factors within your investing, you will underperform financially. The reality is investing currently creates impacts—both negative and positive—in our world. But today we have the opportunity for investors, both large and small, to work to minimize negative impacts and optimize positive ones through the intentional and strategic deployment of their capital. And in recent years investment strategies that seek to generate various levels of financial return as well as the creation of positive social and environmental impacts have come together under the broad banner of impact investing.

This process has occurred because we now know that not only may we invest to create a better world, but we may do this and at the same time provide for ourselves, our families and our community. We can be financially responsible and advance a more just, sustainable planet. The goal of this book is to help you begin to do just that—to invest your financial capital with positive impact or, if you’re an advisor to investors looking to align their assets with their values and life goals, perhaps to refine your approach to helping others engage in impact investing. While it isn’t as easy as just giving your money to someone else to manage for you in order to make more money and it may at times be more challenging than writing a check to someone else to do good in your name, impact investing is a lot easier, engaging, and meaningful than you might ever imagine!

Our audience for this book is, first and foremost, those who are looking to manage their investment capital—whether for retirement or for a lifetime—in a way that takes the best ideas of impact investing and puts them to work. Second, we’re interested in helping those who are currently investment advisors understand what impact investing is all about in order to more effectively meet the needs of their clients. And, third, we’re keen on helping those who are generally interested in impact investing to understand what impact investing is, how it works in practice and what cautions we should all keep in mind as we approach this work.

With that in mind, it’s important to remember the following: impact investing is not about checklist investing where if you just follow a concise list of how to’s you’ll meet with success. This is not a book of simple answers, but rather considerations, questions and ideas for you to keep in mind as you develop and execute your own strategic approach to managing your money for more than simply financial returns. In the pages of this book, we’ve gathered a group of professionals who’ve been active in impact investing for many years and asked them to offer you their best thoughts on how to think about the assets you have to invest, how to approach a process to structure those assets and how to understand how those investments are generating financial returns with social and environmental impacts. Impact investing is a practice, process and journey. And we have complimented their insights with refreshed versions of a few of ImpactAssets’ best Issue Briefs. We’re glad you’ve decided to take the initial step of researching this field of work and look forward to helping you continue on your way!

This book will help you understand the following:

• What are the opportunities within impact investing?

• How might you think strategically from a portfolio level to optimize the deployment and performance of your capital for the returns you seek?

• How to find the most current advice, best advisor for you, and relevant resources you should draw upon as you develop your impact investing strategy?

• How can you best anticipate some of the challenges you may encounter on your path?

• How to develop and assess the best metrics and strategies to communicate your approach and its impact?

• How best to manage your expectations for what is possible today as opposed to what you’ll be able to do tomorrow?

But before we turn our attention to the tools, approaches and practices to help you invest with meaning (as we say at ImpactAssets), let’s get a few things out of the way right up front by outlining some initial considerations!

First, these are not new, untested concepts—impact investing, in various forms, has evolved over a good number of years.

While growing numbers of traditional investors and wealth managers are coming into the field of impact investing and these may be new practices to them, the idea that one can invest with consideration of more than financial value creation is not new. In fact, you may be surprised to learn that the very first company to broadly offer equity shares to outside investors—the Dutch East India Company founded in Holland in 1604—had investors who objected to how the company was being managed and organized a campaign to change corporate governance practices. There were also other investors in that same company who, after speaking out against the fact the company was engaging in mercenary practices (actually, uh, piracy!), sold their shares in protest.¹ Since those ever so early days, investors have been exploring how best to manage their investments in a responsible, ethical and impactful manner. Indeed, in many ways the idea that one’s values should be a part of one’s investing is as old as capitalism itself.

Second, impact investing is diverse with a variety of names and approaches to explore.

We will go into the details of the various types of impact investing over the following chapters, but at the start it is important you understand that since impact investing has evolved out of a number of related areas of investing and business activity, it can go by many different names, with its various practices being called different things by different actors. For example, you may hear people refer to:

Socially Responsible Investing (SRI) (referring to screening out companies an investor does not want to have in his or her portfolio, such as companies selling weapons or alcohol);

Environmental, Social and Governance (ESG) Integration (referring to the idea that if you are not thinking about how extrafinancial factors such as climate change, pandemics or access to water may affect companies you’re invested in, these and other issues could represent off balance sheet risk to your portfolio and threaten its financial performance—much less, not advance a more sustainable planet. And, conversely, ESG Integration also asks one to look for investment opportunities that may provide answers to some of today’s key challenges—and become opportunities for forward thinking investors with vision);

Mission-Related Investing (referring to a philanthropic foundation using its assets to invest in a way that promotes its mission to combat poverty, help create a more just and equitable world or protect the environment);

Microfinance (referring to investments or loans made to small or micro enterprises initially employing a small number of people, often within low-income communities or targeted populations); and

Direct Impact Investing (referring to investors who make direct investments in mission-driven companies and entrepreneurs at an early or growth stage of development).

And any number of other terms that have evolved over the years—many of which have now come to be viewed as falling under the broad umbrella of impact investing. The important thing to remember is these are all tools in the impact investing tool kit.

But don’t let these various terms confuse you or scare you away! If it walks like a duck and quacks like a duck, I assure you, it is a duck! Whether you want to call it a Mallard or a Pintail or a Black Bellied Whistling Duck (truly—that is the name of a type of duck!), the only way you can really tell the difference is if you’re positioned right in there, down in the reeds, as it were, and can pick out the differences between the various ducks. If you care only about one kind of impact duck, then yes, you need to pay close attention and over time, even if you only care about ducks in general you will learn to tell them apart to find just the one you want, but for now simply know it’s all good; the broad field of practice called impact investing includes a number of specific types of strategy and practice—which is great!—but at the end of the day, when you’re sitting there, watching these different ducks and trying to sort them all out, remember, they are all just ... ducks!

Third, this is not a discussion about trade-offs.

In a traditional, bifurcated approach to investing and philanthropy, it is quite normal to ask, How much do you want to give up in order to do good? This question is based on the idea that investing is a zero sum game where you either make money, lose money or you give it away. In contrast, impact investing asks,

What is the purpose of your capital; what levels of financial return do you need to generate along with what types/nature of impact?

More specifically, impact investing is not about sacrificing financial return for some ill-conceived notion of doing good. Rather, it is about understanding the type and form of total, blended value you want to create in the course of your life through your investment of capital and then structuring your investments to achieve your goals as a citizen investor.

Fourth, different investments create different types of impact.

This handbook introduces you to the concept of Total Portfolio Management and within such an approach we understand different investment opportunities offer the promise* of various levels of financial return together with different types of social and environmental impact. Just as you don’t expect to get the same amount of financial return from two investments in differing asset classes—say a bond note versus a private equity investment—you shouldn’t expect to get the same type of impact from all types of impact investments. This is neither good nor bad; it is just the nature of both impact and investing.

We will explore this in detail later in this book, but for now what is important to understand is that your definition of impact and your objectives as an investor will differ from the person sitting next to you on the bus or in a bar, much less in a capital market. And that is a good thing! It means you can pursue various levels and forms of social/environmental returns in the same way you’ll pursue various levels of financial return—all of which combines into giving you the total performance of your portfolio.

Let’s state this again: Simply because one investment may offer