The Impact Alpha | June 7, 2018

The Impact Alpha: ‘Hybrid’ investors seek the alpha in impact

David Bank
ImpactAlpha Editor

David Bank

ImpactAlpha, June 6 – I’m that guy with a Prius who wants a Bolt, if not a Tesla. I may be too late to be an early-adopter but I can see the all-electric future. I’ve got a hybrid; a conventional car would seem like a step backward.

So it is with conventional investing. The term sounds kind of tired and out of gas, doesn’t it?

And indeed, “conventional” investors are adding impact investing products to spiff up their offerings. Wealth managers like BlackRock, JP Morgan, UBS and Credit Suisse are the new hybrids. Along with private-equity giants like TPG, Bain and KKR, they’re the Priuses of capital.

They may not be ready yet for the deep-impact future but, as I argued last week, the logic is starting to infect the hosts. “Conventional” investors are the fastest-growing category of impact investors, according to the latest survey by the Global Impact Investing Network

>>MORE: Agents of Impact start to infect their hosts

More old-guard firms are crossing over than impact-only investment firms are starting up. Already, 75 such hybrid investors reported $88 billion in impact assets, a big chunk of the $228 billion in total assets the GIIN found in the survey. While the total assets identified in this year’s survey can’t strictly be compared to last year’s reported $114 billion, the growth is significant. If such doubling continues, impact assets under management in 2018 would pass a half-trillion. Pretty soon, you’re talking about real money.

One of the standard lines on many conference panel discussions (and I’ve heard a few!) goes something like, “I can’t wait until impact investing is just…investing.”  Inside the hybrids, new impact products and funds will live alongside conventional investments, which the GIIN defines as those without explicit impact intent. Over time, that will make clear not only comparative client demand, but financial performance—and impact.

Hard core

The will is there. The GIIN survey indicated the three top reasons investors are getting into impact investing are still “mission,” “commitment” and “impact goals.” Hard-core finance types tend to look down on those kind of feel-good motivations, but they play a crucial role in attracting early talent and customers. Indeed, the next most common driver is “client demand.”

Rated “very” or “somewhat” important by more than seven in 10 of the respondents, are what might be called “the impact alpha” rationales: exposure to growing sectors and geographies; attractive returns relative to other investment opportunities; and diversification for their broader portfolios.

Five out of every six hybrid investors told the GIIN that their organizations are making more impact investments than they were three years ago. Ditto to a greater commitment to measuring and managing impact. Internal stakeholders are buying in, say nearly three-quarters of the respondents; the conversation has shifted from ‘why’ to ‘how.’ Just 6% face greater reluctance to make impact investments.

Their biggest obstacle: Convincing key decision-makers of the financial performance of impact investments.

Follow the leaders

It’s alpha that will eventually carry the day, or not. “I like that term impact alpha that you have, because anywhere you see alpha, there’s going to be money chasing it,” Ashby Monk, head of Stanford’s Global Projects Center, said on our most recent Returns on Investment podcast. The pension and sovereign wealth funds and other institutional investors Monk works with are turning to renewable energy and other sustainable investments, he says, “because the return profile is attractive…and because these investors see each other doing deals in the space.”

“There is a herd mentality in the pension fund space,” Monk said. “Showing investors that you can do this and make money is incredibly powerful.”

Because “conventional” investors represent vastly more assets than impact-only investors, such a stampede would represent a step-change in the amount of capital for impact investments. The fear of the purists, of course, is that such growth means a dilution of impact and the rise of “impact-washing” as wealth and fund managers seek to cash in on a hot trend.

But as I’ve argued in this space, impact washing won’t deliver the goods. Managers that can find mispriced risk, undervalued assets and overlooked entrepreneurs will.

>>MORE: Big new private-equity funds are on the hook to deliver impact outperformance

The state of play is not all that different from electric vehicles, which still face a raft of objections. Battery range remains too short. There are not enough charging stations. It’s hard to know whether today’s premium prices will pencil out to savings in the long run.

Likewise, the full impact transition may yet be a ways off. In the meantime, the GIIN has performed a valuable service by downgrading legacy investors from “mainstream,” which sounds like dominant, to “conventional,” which connotes outdated. In today’s hybrid world, impact is becoming the new mainstream, and impact alpha the key differentiator.

This is the latest column in David Bank’s weekly series, The Impact Alpha. Catch up on all of David’s columns here.