Unreasonable

Impact Investing Is an Approach, Not an Asset Class

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We need to build impact investing as an approach, not an asset class, by developing communities of practice applying the impact lens to specific asset classes, such as risk capital or public equities.

We need to build impact investing as an approach, not an asset class Tweet This Quote

The GIIN report An Emerging Asset Class, issued in 2009, outlined impact investing as an asset class—a discrete bucket that combined a subset of an investor’s entire portfolio. The thinking behind impact investment as asset class was inspired by Sir Ronnie Cohen, an amazing leader in the impact investment world who was also considered one of the fathers of venture capital—another asset class. The conventional wisdom goes that if investors think of part of their investments as impact investments—an asset class—impact investing is easy and accessible.

Since 2009, the marketplace has evolved to the point where many impact investors (KL Felicitas, Blue Haven Initiative, Chilton Capital Management, Gray Ghost Ventures, and the Sorenson Impact Foundation to name a few) take an impact investment approach across asset classes. There are tremendous public equity funds, fixed income products, large-size private equity funds, and early-stage funds in the mix, and terrific products in each. Unfortunately, the asset class categorization hurts enterprises, and it is important to differentiate risk capital from impact investing moving forward.

Impact investing runs the risk of being marginalized as not charitable enough for philanthropy, not real enough for the mainstream markets. Tweet This Quote

Without a rigorous approach within asset classes, impact investing runs the risk of being marginalized as not charitable enough for philanthropy and not real enough for the mainstream markets. Entrepreneurs in our Village Capital programs really like how impact investors are aligned with their mission, yet we consistently hear that impact investors move far too slow to be useful to companies and do not have the same sector expertise as mainstream investors do. This causes problems as companies grow, because without mission-aligned capital, companies may face larger mission/profit margin questions, but I can’t blame companies for taking the fastest-moving, most knowledgeable capital available—even though I wish it were mission-aligned.

We consistently hear that impact investors move far too slow to be useful to companies Tweet This Quote

For example, I was having a conversation with a somewhat visible entrepreneur the other day, and they said, “the $10 billion that was put into impact investing—where is it? I’m not seeing any of it!” The entrepreneur, working in financial inclusion, had no shortage of investment interest from mainstream banks and financial services institutions, but was hoping to look to impact investing as a source of mission-aligned capital that could truly help them reach under-served customers. Impact investment in the marketplace is re-classified development finance institution (DFI) dollars and large public equity investments, the entrepreneur concluded, but within the concept of risk capital—or alternatives—the impact investment options were far behind the mainstream.

Investors also still have significant confusion, within each asset class, around what impact investing is and what it isn’t. Investors—specifically asset holders—want to know the details of what impact specifically looks like within the asset classes they invest in. If you’re investing in public equities, what is the difference between proactive, intentional impact in a public company and re-packaged socially responsible investing? One investor last week told me that a public equities fund manager told them that their fund invested in Johnson & Johnson “because it was rated a great place to work.” The investor, who cares quite a bit about livelihoods and quality job creation in the US economy, said, “what does that mean? What kinds of jobs are Johnson & Johnson creating, and for whom? What does employee ownership look like? What are governance practices?”

A major criticism of the billions of dollars that are classified as impact investing is that it’s just old capital in new packaging. Tweet This Quote

Which leads to the broader question, how is impact investing different from the socially-responsible screened public equities that have been around for 30 years, or development finance institution investments that have been around for over a half century? A major criticism of the billions of dollars that are classified as impact investing is that it’s just old capital in new packaging.

To clarify confusion, the GIIN could take leadership in organizing working groups around impact approaches within specific asset classes, such as risk capital or public equities. In the early-stage alternative investment world, we at Village Capital spend quite a bit of time informally comparing notes with other investors, and a formal forum bringing together fund managers and investors within specific asset classes could be quite doable. I admire leaders who are part of a growing “100% Network” and putting all their assets into impact investing, as this kind of knowledge sharing is critical.

The GIIN 2.0 would play a leading role in highlighting what we are already seeing on the ground—a convergence between a positive impact on the world and how the mainstream economy operates. GIIN 2.0 can lead shaping a public narrative—impact investing is not really more efficient than philanthropy and not capitalism with a heart, but a paradigm shift in how our world thinks about the interaction between markets and societal benefit. That is more powerful than an interesting but marginalized use of funds.

Understanding impact on a deep and tangible level is difficult, but doable. In order to do so, however, investors need to be more granular about the impact they are trying to have, and at what level. This would require an upshift in thinking on impact objectives.


This is the second post of a five-part series that focuses on leadership and the growing impact investing landscape.