Written by Noah Flower on Thursday, January 26th, 2012
Interview: now is the time to bring institutions into impact investing
I had the opportunity on Tuesday to sit down with Ben Thornley of Pacific Community Ventures, who has published a series of forward-looking reports on impact investing as head of their InSight program. After a year of investigation, he is about to release a new report next month about the potential for bringing institutional investors into impact investing, who collectively manage $22 trillion in capital. He gave us a preview of what he learned in the report and shared his point of view on where the field as a whole is headed.
Working Wikily: What did you find most interesting in the research you’re about to release?
Ben Thornley: It turns out that institutional investors engage in a relatively diverse set of activities that would meet the definition of impact investing, but call them by different names—responsible investing, economically targeted investing, ESG integration, and others. For all the talk of how fiduciary duty constrains activity, we were surprised about how creative they’ve become at ensuring that they can meet their fiduciary obligations and still have an impact.
WW: What do you think is the most important task for the field over the coming five years?
Expanding the audience for the discussion around social capital markets, impact investing, and innovative finance. The conversation has just started.
A lot of the energy today is coming from social entrepreneurs, particularly in the developing world, at the grassroots. When you bring up the topic in casual conversation, people typically talk first about that kind of work; channeling private capital towards the big issues of the day where the investment is most needed—in areas such as health, education, water and other resources, and agriculture.
By contrast, my focus has been on domestic markets and institutional investors. You might imagine there’s a big gap between those two—that they’re worlds apart. I don’t think so. I believe a lot of the lessons we’re learning at the ground level are the things that inform investments at the highest level.
That said, we do have a lot of work to do to grow the provision of capital from the largest investors. I’m excited to find ways to include institutional investors and policymakers.
In terms of policy, the discussion is primarily happening at the federal level; there are also huge opportunities at the state and local level.
In terms of innovative business practices, the conversation is currently focused on SMEs and social enterprise; it could be expanded to include corporate America more generally, to engage them in thinking beyond CSR about their role in a sustainable economy.
And as far as financial innovation is concerned, there’s a ton of opportunities to grow impact investing to be a more broadly recognized form of investment. It’s still largely perceived as a niche strategy. Especially among institutional investors, we need a much broader understanding of what it means to invest with intent and for social and environmental impact.
WW: What will the field need to do to fulfill its potential?
We need to rally around a single definition of what it means to be an impact investor and what an impact investment looks like. There’s a definitional challenge.
For me, the two key elements of an impact investment are the intent and measurable impact. That’s a high bar to get across, but they’re essential elements.
Once we can agree on that, the task is showing people what impact investing looks like. There are phenomenal anecdotes of enterprises and social entrepreneurs having great impact. We need to keep telling those stories, and also to gather enough evidence to show that they’re not just anomalies and can be scaled up to have a broader application across capital markets. We have to demonstrate to the community what impact investing looks like, how it’s possible, what best practices are, and what it means for a whole range of stakeholders to support this kind of activity.
WW: What do you see as the potential roles for consultants and other third parties reaching it?
Impact investing is still nascent and idiosyncratic, and people are still speaking different languages. Impact investing encompasses social investment, community investment, microfinance, and other ways that people have achieved a blended return between financial and social impact. But a lot of these people are talking at cross purposes.
There is a need for translators who can tell the story, both to bring in new audiences and to help the folks who are already involved get on the same page. There’s a lot of work to be done in bringing people together. Where you can establish a basis of independent knowledge and expertise that allows you to play the role of facilitator, bringing people together in conversation is an important role. That’s where I see the need for advisory firms like InSight.
The primary role we play currently is gathering data and evidence. We try to do it in a way that’s intuitive and provides structure. Our priority is identifying case studies: where impact investing has happened, where policy has been developed, where innovation is especially notable, what has made policy reform possible, and how that reform can be translated to other countries and markets.
For example, in South Africa they have made some adjustments to fiduciary requirements providing additional flexibility to institutional investors. It’s interesting to look at how applicable that could be to other environments. It’s a very intensive and detail-oriented task, but an important one.
And then there will always be the role of providing direct advice to clients with their specific problems.
WW: What’s unique about the vantage point at Pacific Community Ventures?
I feel grateful that the policy work and the best practices work we are doing at InSight benefits from the other work of PCV. The equity fund’s work in communities is a great laboratory for understanding the challenges of deploying capital at that level. And our work on evaluation, with large institutional clients such as CalPERS, gives us a unique insight into how they go about investing with explicit non-financial intent. All of those things give us foundational knowledge to feed into forward-thinking idea-generation about field building.
But we’re a small team. InSight is five people. PCV has a total of 15. Part of our challenge is being heard and developing a sufficient reputation such that, when we publish and convene, the findings and ideas are disseminated widely. We don’t want to write reports that sit on a shelf. We want to do work that is applied, practical, and can make an impact.
WW: We proposed the terms “impact-first” and “financial-first” in our 2009 report as a way to distinguish among impact investors. Do you think those terms still fit?
Those terms have been very useful in putting people on the same page. As soon as you say them, people understand what you’re getting at. They will always be useful as a way to broadly describe investor motivations.
But the problem with the terms is that they are mutually exclusive. In a maturing industry, which is expanding to include new players and stakeholders, I think the terms will become less accurate. My sense today is that the leaders in the field see financial and social returns as blended and not mutually exclusive.
As we grow the field, we also have to keep in mind that the idea of impact-first investing makes the mainstream financial community anxious, which is often understandable. I did some research on primarily impact-first private equity investments here in the domestic market, and my sense was that funds for those activities are limited. It’s not a growing pool of capital, whereas traditional markets represent a much larger opportunity.
The language is something we obsess too much about. What we’re talking about here is a sustainable economy that everyone has a stake in. To the extent that we can demonstrate that financial and social performance can be delivered concurrently, the more the practice will grow
WW: How would you characterize the investing mindset you’ve seen at work among institutional investors?
My experience is that one way they think about this work of investing with ancillary social and environmental impacts is opportunistically. They’re certainly not willing to sacrifice financial return.
More generally, it is an increasingly popular idea that long-term growth is tied to the application of ESG criteria portfolio-wide. ESG integration is a conversation happening very much in the mainstream; any major institutional investor conference will include sessions discussing the issue. ESG is gaining currency for the simple reason that institutions want to preserve the value of their assets by avoiding exposure to unforeseen social and environmental risks and ensure that the companies in which they invest are well managed. It’s a financial argument.
An example is the California Teachers Retirement System. Like a lot of funds, they have an “emerging manager” program where they invest in funds managed by women and minorities. Here in California, where we have a large Hispanic population, they would argue that there are companies that have been undervalued, because Hispanic-owned businesses are often not served by the traditional private equity markets. They see that as an opportunistic way to diversify their risks and increase their return, with the added benefit of an “extra-financial” social impact.
WW: You shared an in-depth perspective on the state of measurement in the field with your report in 2010. What do you see as the most important recent developments and exciting possibilities?
There’s been a ton of work since then. There are folks like GIIRS, who are providing a product that will be really useful to a lot of funds and investors. There are folks like us, who do impact evaluation on a customized basis. And there are companies like SVT Group, who imbed impact evaluation into a more mature management and improvement process.
The tools can be very specific to an industry. For example, the Opportunity Finance Network created CARS, which is a way to evaluate the total performance of CDFIs, including on social measures. CARS does a good job of giving that industry most of what it needs for impact evaluation.
I believe there is a growing recognition that the tools now exist for impact to be evaluated, and that people know how to do it. In other words, the nut has been cracked: we understand the key impacts that can be measured, how to collect the data, and how to present it in a way that is useful—whether that’s in a rating like GIIRS, or a customized report like we produce for our clients.
The question is how can we make it cost-effective and efficient, in order to build the scale we need to standardize and create the benchmarks that will really add value. That’s an adoption question. How do we ensure that what we’re doing is what investors want and need?
In traditional financial reporting, there are certain things that people expect—that reporting be transparent, predictable (i.e. regular), that the methodology is known, that it can be benchmarked, and independently verified. All of those things can be done in impact investing. We know how to do that. It’s just making it a more efficient process.
There will always be investors with very specific impact priorities that may require a more detailed, costly, experimental, scientific form of research. That’s fine. But that’s a discrete need.
Once we figure out how to take all of the tools and methodologies and present them and implement them in a way that investors really want, we will build momentum in adoption. That’s what I’m encouraging people to work towards.
Of course the progress is slow, even with IRIS and GIIRS being launched. Adoption happens investor-by-investor— through their use of the tools to do a better job at impact investing.
WW: One final question—how have you seen the field developing differently from one region to another?
I don’t know as much about international developments in impact evaluation. But certainly one of the big differences is the extent to which the government sees itself playing a role. In some jurisdictions government plays a more prominent part, such as in Europe. In India there’s been a rapid series of innovations in ESG reporting. The same goes for Australia. And the conversation is also happening in the US; consider that one of the funders of GIIRS is USAID.