There is tremendous heat behind impact investing, thanks to a confluence of factors: the UNSDGs (United Nations Sustainable Development Goals); a new generation of “woke” investors seeking strong financial and social returns; and growing proof that impact strategies can deliver on both counts. Yet, the sector is still lagging when it comes to helping investors easily sort through their options.
The impact investment sector lacks universally accepted definitions, criteria and models to help investors achieve their optimal mix of double-bottom line returns. Also, cost-effective solutions for gathering and independently verifying impact data are few. These factors need to improve, which creates opportunities for firms to develop solutions.
Karma Insider Carl Liederman is the Founder & CEO of Liedership, a strategic advisory firm focused on the ESG (Environmental, Social and Governance), sustainability and impact sectors. Liederman is also an advisor to Timeless Media, parent company of Karma Network. He agrees this is a need and an opportunity. “We're at this exciting, exciting opportunity where impact together with data, together with the algorithms and artificial intelligence, will provide the tools, the rigor and the ability to really drive profit, people and planet in the direction that would be most meaningful and impactful.”
Strength to Strength
Steering capital away from companies that exploit people and the environment and towards investments that have positive impacts on society and the planet is the guiding ethos of “impact investing.” Since the term was first coined in 2007, the sector has steadily gained momentum.
There were more than 11,000 impact investment deals in 2017 alone, according to the Global Impact Investment Network (GIIN), with the number of funds incorporating ESG criteria growing from 260 in 2007 to more than 1,000 in 2016, according to the Forum for Sustainable and Responsible Investment. Impact investors report their total assets under management have doubled over the past year, from $114 billion in mid-2017 to $228 billion in mid-2018, according to GIIN. Some element of “sustainable investing” now affects $26 trillion or one-quarter of global assets under professional management, according to researchers at Harvard. And by 2020, targeted impact investing is slated to grow to $300 billion and account for 10% of the $2.9 trillion to be managed by private-equity firms, according to McKinsey & Company.
While no investment strategy is ironclad, ESG factors are proven drivers of value. And there’s mounting evidence that impact investors don’t have to sacrifice financial returns and can even improve them. The vast majority of GIIN-surveyed impact investors say their holdings have met or exceeded their expectations for both financial performance (91%) and impact (98%).
Karma Insider Heather Loomis Tighe is a Managing Director at BlackRock and Co-Head of its Institutional Endowments, Foundations and Family Office business for the West Coast and Western Canada. She explains, “The returns actually support ESG investing… in some cases the ESG returns are superior. So if you look back on a ten-year track record, which is the track record of ESG in the United States, you have done exactly the same.” Continuing, she added, “It makes it not only an investment keeping pace in the short term, but it's my belief that it will actually outperform in the long term as these issues that they look to solve become more pressing in the global sphere.”
Problems & Opportunities
Standardization, or lack thereof. The sector has yet to settle on universal definitions, or criteria for gauging impacts. And it’s drowning in data, most of it self reported. This can make it difficult to assess investment options.
Examples of this problem abound. A GIIN survey shows impact investors are still frustrated by “a lack of shared vocabulary to define and segment the industry.” KPMG identified almost 400 sustainability regulations, guidelines, codes-of-conduct, frameworks and other reporting instruments across 64 countries. To make it harder, ratings vary, sometimes widely, across the dozens of agencies providing ESG ratings. But different methodologies, interpretations, objectives, and biases means individual companies can carry vastly different ratings from different agencies. And to top it all off, this all comes with a high price tag, as Independently monitoring and verifying impact data can be cost prohibitive.
Thoughts from The Karma Network
- “I see a lot of liberty being taken by investors and by companies to sort of self-report on avoided emissions. I think that that's a problem. I think that sort of discredits the space in general....I think there's a big opportunity for someone to come in and find way to cost effectively do this.” -Karma Insider Steven Grin 1
- “We cannot take… ratings at face value. They are our guide and… They are a good starting point, but we need more push for more standardization.” -Karma Insider Heather Loomis Tighe
- “The companies that are analyzing the data well, the companies that are modeling and pricing in that risk well, those are the companies that will be ahead of the game.” -Karma Insider Carl Liederman
Nimble fintechs and established corporates are all working, sometimes together, to create analytical and predictive tools to identify, measure and manage impact metrics derived from the dense fog of abundant data. Some notable fintech firms are developing solutions for objective impact data. One example is found in Cambridge, Mass., where Distilled Analytics recently launched its AI-powered behavioral analytics platform Distilled IMPACT™ to manage risk and grow revenue. The company claims that by producing fundamental insight into human behavior, clients can make well-informed impact investment decisions in areas such as economic development, public health, and crime prevention.
Out in San Francisco, CA, TruValue Labs employs its patented AI algorithm to sift through publically available unstructured data - election results, social media, policy changes, worker action, and more - to objectively identify the material ESG factors that affect profitability. The company’s platform can also deliver ESG-profitability trends and forecasts, as well as track UNSDG performance.
The Karma Factor
Putting your money where your values are is going mainstream and it’s creating new opportunities for analytics firms as well as a more promising future for humanity and the planet.
Steven Grin is Managing Partner & Co-Founder of Lateral Capital, a mission-driven fund that invests in early growth stage opportunities in sub-Saharan Africa. ↩