Risk-Adjusted: Finding value in reduced risks for companies and communities (podcast)

Risk is getting an impact makeover.

Systemic risk reduction is emerging as a powerful investment argument for enterprises that can mitigate risks such as food insecurity, water shortages and even human and labor rights transgressions.

Corporations and other strategic investors increasingly are seeing positive social impact as part of their risk-management toolkits, opening a new stream of capital for social enterprises.

In this week's Returns on Investment podcast, our regular roundtable takes on the surprisingly squirrelly topic of risk.

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That impact investments are being seen as risk-reducing is something of a twist, given that many impact enterprises themselves are often considered high-risk. Indeed, for many mainstream investors, the consideration of social or environmental impact is itself a risk factor. “Socially responsible investment has a reputation of not being good at risk,” says Imogen Rose-Smith, senior writer at Institutional Investor magazine, who says impact is still considered a “narrow, illiquid, esoteric investment approach.”

Thinking only about the risk of a single enterprise or investment may be too narrow, however. Corporations, for example, are increasingly working with both social enterprises and non-governmental organizations to try to secure their supply chains, improve their governance (by, for example, improving working conditions in their contract manufacturing facilities) and bolster community well-being. (Amit Sharma and Michael Chodos laid out this approach nicely in an essay last year for the Beeck Center, “Managing Sustainability Risks as Profitable Opportunities.”)

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“Impact investing is taking on issues that are increasingly seen as taking on systemic risk,” I argue in the podcast. “It's another way of framing up the value of investments in water resources, in food security, in climate-risk reduction. If impact investments are seen as risk-reducing, then it takes a little bit of the burden off of whether they're going to be home runs on the returns side.”

Imogen acknowledged the trend but said investors have yet to credit management for such efforts. “The capital market has yet to value those kind of initiatives even as the corporate world has,” she said.

Brian Walsh, head of impact for the New York financial technology firm Liquidnet, added yet another layer to the discussion: “What about the risk of an investment not having the intended social impact?”

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Photo credit: Dan Carlson

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