Features | February 5, 2020

Agents of Impact respond with another half-dozen tools to reshape finance

Dennis Price
ImpactAlpha Editor

Dennis Price

ImpactAlpha’s What’s Next series, produced in partnership with the Global Impact Investing Network, provides a platform for practitioners and experts to reflect on the future of impact investing. 

ImpactAlpha, Feb. 5 – More than two dozen Agents of Impact responded to ImpactAlpha’s call for ideas to shift investor behavior and drive systemic changes in finance as part of our What Next series with the Global Impact Investing Network.

From rewarding community-driven impact (Shu Dar Yao) and tapping cash assets with real impact (Catherine Berman) to putting a value on natural capital (MaryKate Bullen) and supporting new managers (Brian Jones), Agents of Impact are retooling finance.

Catch up on Part I and Part 2 and take a look at the final set:

Increase the costs of extractive business

Eric White, Cogent Consulting

[Our] job is to make the revolution irresistible – adapted from Toni Cade Bambara. It is positive that consumers are changing buying habits to focus on more inclusive and sustainable products and services, but the revolution comes when the cost of buying exclusion/extraction and unsustainably reflects the true social and ecological cost. Until then, we will often be paying more for sustainability and inclusion, and certainly more for measurement, and both will remain luxuries. 

  • Get what you pay for. The focus on measuring helps, but far too few investors seem to be willing to pay for it until they have to, particularly when the mantra of the investment industry is low fees. Unfortunately, in both this example and the one above, we get what we pay for.
  • Raise cost of extraction. I don’t agree that we should seek to cast financial capital as a transformative force for good – capital is value-neutral and return-seeking. Without making the cost of doing business in current, extractive and exclusive ways explicit, all our efforts to change mindsets will fall on deaf ears.

Provide ‘true cost’ reporting

Portland Reed, Realana.io

In this age of accountability, grassroots movements have more influence than ever due to the power of the purse. Let’s look at a stark example of the purse impacting social injustice. 

  • Power of the purse. In 1947, Jackie Robinson was the first prominent Black man to play baseball in the majors. The Brooklyn Dodgers drafted Robinson well before the Civil Rights Movement. Other teams soon followed which led to the end of racial segregation in baseball. Great story, but there is a little-known fact at the heart of baseball’s desegregation: regular folks’ wanted to see Robinson play which created a financial windfall for the Dodgers. Dodgers Attendance Records – 1947.  The “regular folks” were more interested in paying to see a great player than they were in keeping racial segregation. The purse won the day and the impact of 1947 on race relations cannot be overstated. 
  • True social costs. So, back to the article, “…ways asset owners can shift mindsets,…” how ‘bout we take the issue right to the purse! Provide fund managers, consumers and investors with a required transparent annual report that includes an ROI with a social cost calculation alongside the traditional ROI calculation. We “Bend the Arc” of justice by asking the powers that be to require an analysis that includes the impact on society. Let the investors decide with the facts clearly before them if that return is worth that cost. We don’t need to spend time lobbying professionals to change their mindsets, we’re not evangelists. Instead, require companies to show the true costs of their actions and let investors make the most prudent choice. 

Hold governments accountable to E, S, and G

Jana van Deventer, Intellidex

Is it ethical to invest in sovereign bonds? The past decade has been characterized by extraordinarily loose central bank monetary policy across most major developed market economies. This has enticed money managers to rotate into riskier emerging market economies in a bid to extract yield and achieve performance targets. In turn, these dynamics have created an enabling environment for developing countries’ governments to ramp up debt, regardless of often irresponsible fiscal policy. There is a responsibility towards capital managers to reassess whether the continued purchase of sovereign bonds (think Argentina, Brazil, South Africa etc.) is indeed ethical.

  • Poor governance. South Africa is an excellent case study for this, with the ruling government refusing to accelerate the process of transforming the existing energy mix towards a more sustainable and renewable framework given vested interests in the coal industry. State-owned power utility, Eskom, has, through government guarantees, managed to accumulate a gargantuan debt pile of more than $31bn. Capital managers continue buying both Eskom and the South African government bonds due to the very attractive real interest rates that can be extracted through this strategy, thereby facilitating the perpetual existence of an entity plagued by corruption, maladministration and poor governance.
  • Accountability. When evaluating environmental, social and governance performance, Eskom scores abysmally, yet there seems to be zero accountability demanded from both capital managers and investors that are simply chasing attractive returns. Investors must be educated on the role that government plays in failing to address ESG issues. Large funds, meanwhile, need to reconsider whether their mandates, which are clearly creating an enabling environment for terrible government / public enterprise performance, should be reconsidered. Only once funding dries up completely will governments and public enterprises be forced to take remedial steps to correct the appalling performance that societies have grown accustomed to.

Get smart about measuring impact

Meeghan N. Zahorsky, Thoughts In Gear

For investors to put social impact at the center of their investment decisions, they need better data for measuring impact. This includes mainstreaming and standardizing impact measurement and management methods, including GIIN’s IRIS metrics and 60 Decibels’ Lean Data approach. It also demands the introduction of new tools, such as predictive impact analysis. Predictive Impact Analysis (PIA) enables investors to forecast social returns on investment alongside expected financial returns, which leads to a more effective allocation of funds in the following ways:

  • Returns on investment. Social returns can be weighed with financial returns. All too often, impact investors are only comparing financial returns and social returns are considered immeasurable or only measured post facto.
  • Forecasting impact. It forces due diligence processes to include impact measures, not just a single screen or reliance on outputs only. Forecasting impact during the due diligence processes strengthens due diligence by exploring the magnitude of the impact an investment will have.
  • Ongoing monitoring. It sets a framework for monitoring the impact of investments from the onset. The big question many investors are still facing is how to collect impact data throughout an investment. After PIA, investors and investees have a framework to monitor progress to the expected impact returns.
  • Attracting impact capital. It can justify the allocation of funds and thereby drive fundraising efforts, bringing in more investment. Impact investors are not only interested in financial returns, but if financial returns are the only measure given to them, that will be the focus. With quantified social returns, impact investors can responsibly channel funds in an impact-centric manner.

Distinguish between “real” and “paper” impact

Andrea Vigevani, ICU – Istituto per la Cooperazione Universitaria

The issue is how to measure impact in an objective way, i.e. in a way that allows to compare different investments with a quantitative approach, as it is for risk and return. Return is easy to measure, risk somehow also (or at least one can choose a given metric among different possibilities and use it to compare different investments), impact not at all. In addition, “real impact” (value creation for all share- and stake-holders, employment creation, etc) and “paper impact” (ESG certification etc) can be really different.

  • Real vs. paper impact. For instance I am sure there are traditional equity funds that have far better “real impact” (e.g. value investors that select companies based on long-term perspectives regardless of their “impact certification”, ESG, CSR etc) than the “paper impact” of some ESG equity funds that get lot of papers to demonstrate they are good but invest in really normal companies (e.g. large energy companies with very short-term mindset trying to maximize financial performance every quarter whatever it takes and getting some ESG paper or doing some small CSR or renewable-energies programs to show they have a deep ethic). Bottom line, I agree we all must shift towards impact but please do not take it with a bureaucratic approach.