Impact investing: empty trend or essential tool?

May 31, 2018

Philanthropy New Zealand CE Tony Paine explores the current trends in impact investing where your investment decisions can match your mission.

For most of its history, philanthropy has seen wealth-making and donating as two very separate activities requiring different skills, definitions of success, and, at times, ethical compasses — the model being to maximise returns on investment to support grantmaking.

In recent times, this approach has been challenged and is changing in two ways. It does matter how the wealth is created and where the money comes from; just ask the Sackler family in the US, where the ethics of their philanthropy on the back of the sale of deadly and addictive opioids has been called into doubt by recipient organisations.

Just as importantly, we are seeing an increasing realisation that our power to do good is exponentially increased if we think about our balance sheets as well as our granting budgets. We are realising that in the face of urgent, intergenerational social and environmental issues, our grantmaking will never be of a scale to really turn the dial on causes and prevention. As the Case Foundation’s helpful Short Guide to Impact Investing has it: “If the head has been making investments and the heart giving it away, it’s time to unite the head and the heart and make more money.”

Moves to align investing activity more closely with mission started with ethical and responsible investing, which has largely been decision making about screening and what not to invest in. The conversation has now moved to the positive impact of targeting investments that produce financial returns and social or environmental good. Made possible by the growth and increasing sophistication of micro-financing, community lending, social enterprise and millennial entrepreneurship, philanthropy is discovering some new ways to invest our funds to help make the world a better place.

It’s worth positioning this growth in the context of questions about the nature of the global economy and how we resource social and environmental good. We can’t ignore the ways our extractive, high-carbon, ‘endless’ growth economy has contributed to terrible inequality, environmental degradation and an erosion of social cohesion. Just as investment and granting are aligning, so too are charity and enterprise.

This is cause for optimism in a world where just making money or just doing good are rapidly becoming unsustainable and ineffective solutions to human need. The old borders are blurring. 

If impact investing refers to “investments made into companies, organisations and funds with the intention to generate measurable social or environmental impact alongside a financial return”, what is the scale of the current and future markets? Ākina’s 2017 report Growing Impact in New Zealand puts current global impact investment at US$248BN, and the potential size of the market in New Zealand at $5BN. It’s worth noting that those figures are small in the context of global markets but are approaching a scale that will interest institutional and large-scale investors like the sovereign super funds.

It’s fair to say that with a couple of notable exceptions the response of investment advisors locally has been cautious and muted. That’s not surprising in a field where the promise to date has far outweighed the performance, but that’s changing. We are seeing some advisors slowly positioning themselves to be able to offer advice to philanthropic investors about options and risks in adding impact investment to their portfolios, and that needs to continue.

Some examples of growth in local philanthropic involvement in impact investing are covered elsewhere in this magazine. Green shoots like NZ Super targeting climate change-related investments, the successful launch of the Ākina New Ground Capital Impact fund at $8M, and the arrival of impact-savvy operators with strong international track records like The Nature Conservancy complementing early local adopters like Tindall, WEL Energy, Rātā and BayTrust are encouraging.

Market building is also on the rise, with education, support for creating investment-ready products and creating more capable intermediaries operating between investors and the market, gaining much-needed structure. The mantra to date has been that our challenges to bring impact investing to scale in New Zealand are much more to do with investment opportunities than supply of capital.

That’s why Philanthropy New Zealand has been instrumental in establishing New Zealand’s Impact Investing Network, and several PNZ members have contributed funds in support. The Network will soon be announcing the creation of a National Advisory Board, and PNZ will continue to work with the sector to lobby government for their support in growing the market.

It’s also why negotiations to create a co-funded impact investment fund supported by the Crown and philanthropy are on the back-burner. The context has changed significantly in the three years since PNZ and philanthropic leaders mooted the concept, and across the sector the collective wisdom is that the best role for government is likely to be as an enabler rather than investor. This may change, but at present the action in our sector is at an individual organisation level with trusts and foundations looking for opportunities to deploy small percentages of their portfolios in pursuit of impact.

One option on the table is to test the waters by using grant budgets to fund ‘investments’. This option avoids concerns about poor investment returns given that grant money is written off in any case. If done well, this option may provide a useful proof of concept and give some reassurance to boards.

Like all new opportunities, the growing pains are significant. Concerns have been raised about definitions (what counts as an impact investment, and how do we measure intentionality and impact?), financial returns (are we fulfilling our fiduciary duties if our investments produce below-market financial returns?), ethical issues (should we be ‘making’ money out of human misery?) and scale (currently a marginal activity using a very small percentage of funds under management).

Some issues will inevitably be more amenable to impact-related solutions than others will. It will never be possible to create financial returns in every programme or intervention designed to make the world a better place. Environmental projects and housing seem like relatively quick wins with features like relatively straightforward measurement of impact, capital gains, and carbon markets conducive to creating returns.

For those willing to invest by taking equity, the growth of social enterprise offers broader options, albeit ones with a unique set of risks and challenges.

The Ford Foundation has committed $1BN of their $12BN endowment to impact investment over the next 10 years. This commitment is an inspiring and compelling reminder of international philanthropic assessment of the importance and efficacy of this kind of investment. It’s a challenge to New Zealand philanthropics, grantmakers and our advisors. The scale of our impact and possibly our relevance will depend on how well we respond.

The Case Foundation’s ‘A Short Guide to Impact Investing’ is a great short exploration of the issues well supported by real-life examples. Download a copy here.