Every now and then a book comes along at just the right time. Impact by Sir Ronald Cohen is one of those books. It was written before Covid (there’s an inserted page at the beginning that references as much) but everything that has happened in 2020 just goes to strengthen the argument.
Ronnie starts by telling a little of the history of impact investing – how it had many beginnings but really gathered momentum after the term was coined at a meeting in 2008. But part of the story is also about ‘social investing’ – a term that goes back to the 90s – and ‘ESG investing’ which really started back in the 80s with activist investors attempting to get funds to divest from stocks that they felt were harmful to the planet or whose ethics they disagreed with. Sir Ronnie has been involved in many aspects of this history from helping to create the first social impact bond to chairing government task forces on the topic and as founding chair of Big Society Capital. He’s certainly made his mark on many of the important building blocks of the impact investing world.
But I think it’s the logic and argument of the book that really resonates right now. Lots of people feel that our current form of capitalism is destroying itself and that the relationship between government, finance and social and environmental progress needs to change.
For investors the idea of measuring returns is obvious. From ancient times, the idea of lending or investing capital in order to gain a return has been one of the foundations of our economic system. Businesses raise money, put it to work, and then pay back their investors with a return.
In the 20th century, the concept of risk became much better understood – how can we measure the risk to the return that is being promised by taking into account volatility, political issues and so on. The financial services industry got better and better at measuring the risks of various types of investment so helping them to make better decisions.
In the 21st century, Cohen argues, impact will be added to the equation. All investment decisions will take into account return, risk and impact. He argues that technology has enabled us to calculate and assess all of these much more accurately and impact is in many ways easier to measure than risk.
I was lucky enough to interview Ronnie a couple of weeks ago for our Practical Optimist newsletter. You can see that interview below.
2018 was the year impact investing started to reach a much wider audience in the investment world. It went from the occasional mention in the media in previous years to a torrent of speeches, events, announcements and even billboard advertising campaigns, particularly from big financial services companies. It all kicked off when Larry Fink (CEO of Blackrock, the world’s biggest asset manager) used his annual letter in January to say that in the future they would take social purpose into account in the companies they invest in.
Less policy, more practice
This might be overly optimistic, but I think 2019 could be the year that the words and policies begin to translate into practice. I’d like to see some of the financial services giants start to make real investments and be able to say how much capital they’ve put to work to make the world a better place. It needs to be more than impact wash though and live up to the definition:
“Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
Charities get their houses in order
I hope that more big charities and foundations get behind the idea of 100% impact investment portfolios for their endowments. It’s shocking to me that we often ignore the impact of what a charity does with the money in its endowment but looks at every detail of the money that it gives away. It just doesn’t make sense. It’s possible that many large charities are doing more damage with their money by investing it in oil, tobacco, arms, gambling and so on than they are doing good with the money they get back from those investments (which may well be negative this year as well!). I hope they change before we see more scandals. There are some great networks like the SIIG for charities and foundations who want to learn more and I hope we see those continue to thrive.
BCorps continue to grow
I also think the BCorps movement will continue to grow in 2019. It’s just common sense. The framework the B Impact Assessment gives is excellent and the community of business that have certified gets better and better. I think in 2019 we’ll continue to see BCorps getting investment and be acquired by larger companies, which will attract more good companies to the community.
Unfortunately, I think the impact investing sector is now getting to a scale where there will be a big scandal at some point. My guess is that it will come from the world of very rich people dabbling in impact investing through vehicles they’ve set up themselves. The attitude has been wrong there for a while. Will it be a Bad Blood style unwinding of the story of a large impact venture or fund? I’m not sure. I should stress that I have no inside information — this is just a hunch. It will be interesting to see how the sector responds to intense scrutiny.
Don’t forget who this is for
2019 will almost certainly be a year when the world needs impact investing more than ever. If Brexit happens it will disproportionately hurt people who are already hurting. Climate change seems to be even worse than we thought and will affect poorer people more severely. We absolutely need to ramp up impact investing to tackle inequality and try to halt the damage we’re doing to the environment as soon as we possibly can.
It’s struck me for a while that there are similarities between really good investors and great investigative journalists. The most obvious similarity is that they both ask good questions but I think there’s more to it than that.
As a journalist you have to uncover a story that nobody else has told. You have to zig when others zag, not just to be contrarian but because you believe in the importance of the story even though nobody else might at the time. I’ve lost count of the number of movies where journalists have to convince their editors that the story they’re working on is worth pursuing (why is it that editors always come in for stick?). Journalism is often a fairly lonely business in the early days of a story. You might get a big team working on a story once it has grown but when you’re finding out about it for the first time, it’s one or two people.
There’s also their role in uncovering information. Both professions rely on hard facts and those facts might not seem hard when you first come across them. In the case of journalism, it might be that somebody is trying to hide facts from you. In startup investing, it’s often that even the founders are struggling to spot the hard facts themselves. It takes pattern recognition to notice when things are really important and when things are inconsequential.
Then there’s the importance of telling the story in both professions. For journalists that’s obvious — if you can’t tell the story well you’re not going to get very far. But as an investor, the process you go through is one of helping founders to tell their own story to customers, other investors and the outside world. I think this is even more important for impact investments where the story of the positive social or environmental effect that the company’s product or service has should be an integral part of its value.
There’s a similarity in the temperament of great journalists and great investors that I’ve noticed as well. Both are hooverers of information — they read huge amounts and are constantly are looking for the next story/venture. They know that many of their investigations will come to nothing but all of them are good lessons.
Every discussion about impact investment tends to includes somebody asking ‘what do you really mean by impact?’ or it focuses on the potential returns from impact investment compared to ‘conventional’ investment — the assumption being that there is a trade-off when you make social investments.
The first is a live issue for us at the moment because we’re designing something new at BGV and deciding who we should pitch it to and how. So I’ll be having lots of discussions about this in the coming months. I’ll come back to the other one in another post.
At one extreme, impact investment is providing capital to (usually) charities that have a proven track record of delivering social impact and when you put money in, you get social benefit out. The difference to a grant or donation is that you look for a model that means you also get money back, usually because there is some third party who is willing to pay for that social impact.
At the other extreme of the scale you tip into what you might call positive investment where you really just screen out ‘evil’ investments. Something like an SRI fund for example.
The distinction between impact and positive investment is whether you decide upfront what kind of social or environmental impact you are trying to achieve and then set out to measure it. Do you have a specific goal (or small number of goals) in mind? If you do, then that’s impact investment. If you don’t then it’s positive investment.
This matters because it determines who might provide the capital for your fund. There is a spectrum between the two but different investors will have different cut offs as to where they will invest.
For me this is the real debate about the future of impact investment. It’s got nothing to do with the legal form of the organisations you invest in (that’s a red herring) but is about the intention of the investors and the founders of the ventures and then how you measure and improve the realisation of that intention.
Luni at Fledge has written a great blog post about what doesn’t make it into their programme over in Seattle. We could have written an almost identical list for Bethnal Green Ventures (applications are open for our Summer cohort by the way!). The only thing I’d add is that you can greatly improve your chances by getting in touch before you apply and having a chat with one of our team either face-to-face or on the phone. Just by talking it through with one of us, you’ll get a feel for what our selectors are looking for and things you definitely should include in your application.
David Brooks wrote a great op-ed in the New York Times this week about impact investment. I think he’s right that it’s one of the most interesting and exciting sectors to work in at the moment. He contrasts it with working in finance or government:
“The big debate during the 20th century was about the relationship between the market and the state. Both those institutions are now tarnished. The market is prone to devastating crashes and seems to be producing widening inequality. Government is gridlocked, sclerotic or captured by special interests. Government is an ever more rigid and ineffective tool to address market failures.”
Of course, they’re both still important, but neither is growing or really capable of radical innovation. Certainly watching where smart people go after university or after they’ve been working for while, they’re heading towards social ventures or impact investment in much greater numbers.
Initially I have to admit when people told us what we were doing with BGV was impact investing, I was a bit resistant to join a bandwagon. In the UK it’s been called social investment but now is usually called impact investing or social impact investing. The one problem here is that some people see it as just a way of funding existing charities. That’s important too but is only a fraction of a percent of the opportunity. There’s huge amounts of capital available and a vast reserve of talent that wants to help create the ventures. The challenge for impact investors is to bring those together in an intelligent and ethical way and then prove that it had a positive impact.
We shouldn’t jump in uncritically but it’s starting to look promising. As Brooks says:
“Impact investing is not going to replace government or be a panacea, but it’s one of a number of new tools to address social problems. If you want to leave a mark on the world but are unsure of how to do it, I’d say take a look.”