Aside from promise, speculation and skepticism are some of the ways to describe the impact investing sector today.
Speculation because people wonder whether impact investing will take off, how it will take off, or what issues need to be addressed for it to take off. Skepticism because of the many unknown aspects of impact investing, the lack of track records, and the fact that change is fuzzy and untidy, characteristics no different in an evolving sector that has as widespread an implication as impact investing.
While impact investors and social enterprises fumble with these questions, experts convened in Switzerland last month for the Zermatt Summit to take a step back to rethink what’s the point of impact investing, provide some insight about the sector, and refocus on the big picture.
A major theme in the discussions is to reframe the way we think about impact investing. This includes its definition.
“Any investment has an impact. There always is an impact. The question is when would you consider it something that deserves the name ‘impact investment’ and when is it just a regular investment? I think that’s really the challenge that we’re at,” began Martin Rohner, CEO of Alternative Bank Switzerland.
“If you look at it like that, then you start realizing that impact investing probably becomes very contextual.”
Impact means different things for different investors. Rohner’s notion that all investments have impact underlies the divide in investing – those that have positive impact and those that have negative impact. Mindful investors would have to look at where to draw the line.
“Probably the way to go, in my opinion, is that you develop a stakeholder dialogue around where you want to set that benchmark.”
At the same time, Rohner cautioned that without enough stringency in the definition there’s a huge risk in disappointing investors and the whole industry will lose credibility.
Wolfgang Hafenmayer, Managing Partner of LGT Venture Philanthropy, believes that instead of asking whether impact investing will succeed or fade, the question needs to be reframed by asking, “Will we survive as humankind if it’s not succeeding?”
“If impact investing is defined as investment activities which have a positive financial return and a positive measurable social/environmental return, then all other investing activities which go for a positive financial return would then have a negative social/environmental return,” he said, agreeing with Rohner’s comment that all investments have impact.
“If the majority of our investments on this planet have a negative social/environmental return, then we’re destroying our own basis for living.”
In other words, investment without livelihood is meaningless.
On that note, Hafenmayer believes impact investing is here to stay because “if we want to continue to benefit quality of life on this planet, there is no way around investing in a way where we’re smart enough to create positive social and environmental impact as well. We can’t afford to invest creating negative social/environmental returns.”
“This whole notion of impact investing being just another asset class becomes obsolete. In the end it’s a question of how to transfer the investment activities from the traditional way we have been doing it over the last couple of decades or even more, into impact investing.”
Would it mean that all investments in the future would become impact investments as we know it today? Hafenmayer seems to think so.
Similar to the proposition that all investments have impact is the idea that “every investment is a tradeoff”, says Hafenmayer. In the impact investing field, the dialogue tends to surround tradeoffs between social and environmental goals versus financial returns.
What bothers Hafenmayer is when investors talk about chasing market rate of returns. “Market rate of return – what does that mean?”
Over the last ten years, studies of private equity in Europe revealed dismal performance in terms of financial return. Hafenmayer said as low as zero percent from Q2 to Q4. “So does that mean the market rate of return of private equity is zero percent in Europe? I don’t know, no one knows. But we’re talking as if everything will be clear.”
“We always say ‘depending on the financial return of a company investors would invest’,” added Hafenmayer. “That’s just one indicator based on which investments are done. Otherwise, all the investments on this planet would have to go in one single company – the one single company with the highest return.”
“Personally I think you need to agree on a minimum (financial) return,” said Rohner on a solution. “It can be very modest, for example maintaining your capital plus inflation. Then you try to maximize impact. But as soon as you are leaving that one variable open – the return variable – there’s a huge risk that you maximize your return variable and basically minimize the impact. The whole concept becomes very fuzzy and meaningless.”
Over the last five years, there have been plenty of measurement tools developed to help measure social and environmental impact. It’s presumed that metrics help identify tradeoffs between financial returns and social and environmental impact, but since the sector is struggling to describe the impact it gravitates towards what is more easily quantifiable – the financial returns.
When investment decisions are based on financial metrics alone, they tend to favour ones that have higher returns. That’s why impact investing practitioners want to develop some common basis for articulating and measuring impact.
However, Hafenmayer believes the sector is too skeptical for its own good. “We say we have to do everything before we can continue to do things, as if mainstream business would have figured it all out.”
He explains that even in commercial businesses, many things haven’t been figured out, but people “often talk about a new segment as if we have to figure out everything before we’re even allowed to talk about it. I mean we’re learning while doing and we’re constantly improving things.”
“We’re also saying commercial companies have very clear measures,” said Hafenmayer. “Everyone in this room who has ever done an analysis in a large company and has gone through all their accounting systems will for sure have seen that nothing matches up. In the end, it’s good guesstimates of where we’re more or less.”
While certain practitioners believe it is necessary to simplify metrics and for businesses to dig deeper into their ripple effects, Hafenmayer warns, “It’s never going to be possible to measure all different interdependencies and all the unwanted consequences that you have. So we should not go out there with the expectation of being able to measure everything perfectly. That’s why we have to be cautious. We have to be humble about what we do. At the same time, we should not create a picture of us just trying out everything.”
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