Last week I gave a webinar on the subject of “Engaging Investors in Impact Investing” and, prompted by a question, touched briefly on one of my favourite pet subjects: the evolution of this market place.The question was actually whether or not I think impact investments are an asset class. And my answer to that question is yes, no, and I don’t care.
Let me explain. If one looks closely at any set of impact investments, one will see a range of products – debt, equity, hybrid. These are quite clearly separate asset classes in their own right, so the answer to the question must be “no”. And yet, I find the arguments put forward in JPMorgan’s “Impact investments: An emerging asset class” about the requirement for a unique set of skills, organisational structures, etc. to be very compelling. So the answer to the question must be “yes”.But hang on a minute. Where should all of this be going in the long term? My ultimate personal goal is to see all investors considering the impact of all their investments. Whatever one invests in, the underlying organisation or project does have an impact – positive or negative, on someone or something, somewhere. (You show me one that is “neutral” and I’ll show you an infinitesimally narrow line). You simply cannot avoid this fact. To bury one’s head in the sand and ignore the impact of one’s investments strikes me as belligerent at best. Invest blindly and give? Come on…
Ok, before too many under-collars get too hot, I totally accept that the tools to do this are only beginning to come into existence. Hence my point. At the moment, we typically invest according to the rules of risk and reward. More of one should mean more of the other. (My personal experience does not bear tribute to this, but that’s an entirely different matter). Pleasingly, investors are beginning to consider some of these issues as shown by the rise of SRI, ESG and the like. Used in the right way, these can be extremely powerful tools and indeed there is a ever-growing record of corporate behaviour being changed for the better by positive shareholder activism.
And yet, this approach to “impact” is still seen too widely as simply an extension of risk. “If there is a massive oil spill, the environmental clean-up bill will dent profits and cause the share price to fall”. We evaluate the impact of an organisation’s activities and then define the output not in terms of impact itself, but in terms of volatility – or risk as it’s known. In other words, we continue to think in two dimensions.
However, if we are to make true progress towards the numerous issues facing us globally, we need to start thinking in three dimensions – Impact, Risk and Reward. I’ve been going on about this for quite some time now and am pleased to have discovered that someone else has already given it a name – 3-D Investing, copyright Mr Rod Schwartz. I heard him use the phrase two weeks ago at the launch of the ClearlySo / City of London Investor Perspectives publication and told him then that I’d start to use it because it perfectly describes the universe within which investors must start navigating.
Every investment must start to be viewed in terms of its risk, financial reward and impact. Not impact in an airy-fairy shove-it-in-the-risk-bucket sense. But impact as impact. Good or bad. Environmentally positive or socially negative. A fully developed understanding of impact that encompasses the full effects of what an organisation does across its entire operations. Wouldn’t that dramatically change the way we see things and, hopefully, do things? Such an understanding would enable investors to choose their position within a 3-dimensional universe. Actually, let me refine that – see their current position within a 3-dimensional universe, evaluate it and, should they wish, change it. And simultaneously today’s “impact investments” simply become investments within this universe, hopefully skewed to the positive side of impact.
Is it easy? No, of course not. Distilling multiple impacts down to a single measure, perhaps a number, is far from simple. Is a “5” really better, to me, than a “4”? I for one have been quite opposed to this in the past and yet it is the natural conclusion of the foregoing. I need to think on this point further…
But is a new approach to investing (I nearly said paradigm) so hard to envisage? Rod pointed out to me (he being fractionally, uh, more experienced than I) that investments used to be considered in just one dimension – return. The volatility of the 1970s and 80s led to the creation of an industry around understanding, measuring and controlling risk, and the ingraining of the concept of risk-reward. 2-dimensional investing. So is it really that hard to see that, as we grow in comprehension of the long-term impact of our actions on people and planet, we need to create another set of tools to help us understand, measure and control impact?
So, back to the original question. Is impact investment a new asset class? Personally, I think it’s completely missing the point. Do we need to radically improve the way we manage our investments? Absolutely. We need to start thinking in 3-D.
And preferably without the ridiculous glasses.
By Martin Rich, Director at Social Finance