Impact Investing: Poised for Growth

Categories: Portfolio Management, Private Wealth Management
Impact Investing: Poised for Growth

Impact investing, which aims to deliver a measurable social and environmental impact alongside a financial return, has been experiencing strong growth and consequently gaining the attention of professional investors and high-net-worth clients alike. Last month, CFA Society of San Fransisco organized a special half-day educational event on the topic called Impact Investing: An Exponentially Growing Market. Daniela G. Lee, CFA, a senior investment associate at Wetherby Asset Management, has summarized the main takeaways in this guest post.

By Daniela G. Lee, CFA

After Ron Cordes sold his company to Genworth Financial and set up a family foundation in 2006, he soon found that there were few products or resources available for making social and environmental impact beyond traditional grantmaking. So Cordes cofounded ImpactAssets, a nonprofit financial services company based in Bethesda, Maryland, that aims to help solve the world’s toughest problems by catalyzing investment capital for maximum environmental, social, and financial impact. Cordes’ desire to marry social and environmental impact with a financial return nicely illustrates the emergence of impact investing, which has evolved into a multi-billion dollar industry over the past five years — and which traces its roots to socially responsible investing (SRI) and environmental, social, and governance (ESG) screens in investing, both of which have limited impact. As the keynote speaker at a CFA Society of San Francisco event titled Impact Investing: An Exponentially Growing Market, Cordes shared his insights on the sector, joining four other national experts in a discussion of the challenges investors face in sourcing and performing due diligence on impact investments, the process used to create impact in client portfolios, and the question of measuring and reporting on impact.

So what exactly is an impact investment? It can span many causes and asset classes, including private equity, notes, bonds, loans, and loan guarantees. Sourcing impact opportunities, however, continues to be a major challenge for financial advisers. Still, progress has been made to identify impact investments, and public databases are now available.

Impact Base, for example, is an unscreened compilation of all investable impact funds maintained by the Global Impact Investing Network (GIIN), a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing. ImpactAssets 50, compiled annually by ImpactAssets, screens the 50 largest private debt and equity managers within the impact investing industry. These resources are invaluable when sourcing and beginning due diligence on impact investments.

The definitions of both risk and return for impact investments are expanded beyond the financial realm to include social and environmental factors, adding a layer of complexity over traditional investments. As Marie Jorajuria, CFA, vice president of finance and compliance at Equilibrium Capital Group, put it during the conference: “There is no sustainability without profitability. You are looking for the alignment of profit and sustainability.”

Among the speakers there was consensus that many investors today are looking to their investments for more than just financial return and are bringing impact investment opportunities directly to their financial advisers and asking for input. Deb Wetherby, CFA, CEO and founder of Wetherby Asset Management, helps clients integrate their mission with their portfolios by using impact investments. She explained that advisers must begin the process with a conversation to explore and understand what their client’s mission is.

An important piece of integrating impact investments into client portfolios is determining which investments are mission-related opportunities that meet traditional institutional investment standards while also achieving mission impact, and which investments are mission-driven opportunities that further specific mission interests while also providing a financial return. Adding impact investments to client portfolios can be a great tool to strengthen advisory relationships. “Focus on what your client’s mission is and what you can find that is on point with their mission,” Wetherby counseled attendees.

Once an impact portfolio has been implemented, clients want to know what social or environmental impact their investments are producing. There was wide-ranging agreement that reporting on impact continues to be a big challenge. The GIIN has developed the Impact Reporting and Investment Standards (IRIS), a set of quantitative metrics that can be used to measure and describe an organization’s social, environmental, and financial performance. For example, how many jobs has an investment created?

Such results can be difficult to compare across geographies, and capturing long-term outcomes is difficult. For instance, the creation of one job may allow a family to put its children through school, and that has further positive impact on the family and the community. Qualitative reporting, or relaying investees’ stories, captures this aspect. However, as Amit Bouri, managing director at GIIN, pointed out, “relying solely on anecdotal reports may lead to investing with the best storytellers and not necessarily the most effective problem solvers.” John Goldstein, managing director at Imprint Capital Advisors, advised practitioners to determine “what you are trying to measure and why, and then do the best you can” in order to relay as complete a picture as possible to investors.

The speakers agreed that there is still immense untapped potential in the field of impact investing. Today, $300 billion is given philanthropically in the United States each year. Yet there is more than $50 trillion held in capital and investment accounts. Tapping just 1% of this investment capital could be incredibly powerful, allowing impact investing to scale up and experience exponential growth. Among both institutional players as well as high-net-worth individuals and families there is strong demand for impact investments as a complement to traditional philanthropy — and as a catalyst for deeper conversations about money and its meaning beyond financial return and standard deviation.


Daniela G. Lee, CFA, is a senior investment associate at Wetherby Asset Management


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/MHJ

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3 comments on “Impact Investing: Poised for Growth

  1. Pingback: Impact Investing: Turning a Profit and Changing the World | The Elephant

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