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Counterpoint: ‘Market-Rate’ Funds Should be Benchmarked to Impact, Too

A basket of impact investment funds measured solely for their impressive social and environmental returns would justifiably prompt the question, “How did they perform financially?”

So it is with two reports this year that analyzed data from investment funds and found that, at least in some categories, they matched or outperformed a comparable set of ‘normal’ funds, with overall financial returns at least close to ‘market-rate.’

How about their social and environmental returns?

The headlines suggesting impact investments can generate market-rate returns will certainly help raise the sector’s profile and popularity. The recent joint publication from Cambridge Associates and the Global Impact Investing Network (GIIN) sought to introduce the “Impact Investing Benchmark.” At first glance, the results are extremely impressive, showing  that some impact investing fund categories have financially outperformed a selection of comparable ‘normal’ funds while overall returns are close to market rates. The obvious conclusion is that investing for impact does not necessarily lead to lower financial returns, which is the headline being spread by various news outlets.

The recent publication from Wharton‘s Social Impact Initiative likewise placed the focus squarely on financial returns. At least Wharton stopped short of using the term “benchmark” for its performance data.

Developing guiding principles and benchmarks for the impact investing sector is not easy. These efforts can be taken as the first step in an iterative process, as noted by the authors. But the first step in should be in the right direction.

The most glaring problem is that social impact often takes a back seat. Impact assessment and measurement is a complex task, and it is unreasonable to expect that a novel benchmark would provide a fully comprehensive aggregate for the impact generated by all the funds involved.

Still, using a self-reported intention to generate social impact as the only impact-related inclusion criteria falls short vis-à-vis the overall spirit of impact investing. The message coming from the benchmark as it is currently stands is that good intentions are enough, while good returns are great.

By not including an explicit measure of social impact, the focus of the benchmark gets placed exclusively on financial metrics. Financial metrics are important, but what exactly is the point of impact investing?

Highlighting the financial performance of impact investing funds vis-à-vis their ‘traditional’ counterparts could attract purely financially-motivated investors who would normally steer clear of the sector.

A benchmark represents the level that others should strive for. Eventually, the whole crowd could end up following the benchmark, with investment managers incentivized to outperform or at least to meet it. This powerful and guiding instrument should represent the leading indicators of the market.

This danger is exacerbated by including only impact investing funds in the benchmark, which only target market-rate returns or above.

Impact investing is defined as double bottom line investing. One of the core characteristics of impact investing defined by the GIIN is “the commitment of the investor to measure and report the social and environmental performance and progress of underlying investments.”

In excluding any indicator of social impact and focusing on the most financially-oriented impact funds, the new “Impact Investing Benchmark” has limited applicability for the impact investing sector. Framing the discussion purely in financial terms detracts from the amazing work and impact achieved by so many pioneers in this area.

Disclosure

Bjoern Struewer is founder and CEO of Roots of Impact, an incubator and consulting firm that is building the market for impact investing. Roots of Impact creates intermediaries, investment vehicles and partnerships that help finance social enterprises and scale social innovation.

Rory Tews is advisor for social entrepreneurship and social impact assessment at Roots of Impact. He has recently completed his PhD in sociology on the topic of social entrepreneurship and is working on the publication, while further areas of competence include impact investing and social innovation.

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