When impact investment meets ethical investment

Over the last few weeks I’ve started to wonder whether we might see two trends coming together to create something new.

The first trend is the growth of impact investing (sometimes known as social investing) which aims to help create and grow new ventures that have a social or environmental impact. With investors in this group predicting that they will invest $9 billion this year, that’s a lot of ventures. It means that there will likely be a lot of big successful companies in five years time (as well as many failed attempts of course) with investors and founders who would like to exit from the businesses they create.

The other trend is increasing demand from large institutional investors for more ethical places to put their money (known as ethical or socially responsible investing). The Church of England was stung a few weeks ago and I’m sure would love to be able to put more of its money into companies that it can be sure are doing good in the world. On a much bigger scale, investors like Norway’s oil fund (worth a whopping $760 bn) are also coming under pressure to invest more ethically and large charities (the Wellcome Trust’s sits on £14.2 bn) and public sector pension funds (the Local Government Pension Fund is worth £148 bn) also have to find ways of delivering a return on capital across a portfolio of assets without causing controversy. One estimate I’ve seen says that there is £21 billion that is managed as ethical investment in the UK but I think we can expect that to grow substantially in the next few years.

The opportunity I can see is where these two trends meet. It’s for an asset manager that buys whole mature social businesses and acts as an ethical shareholder. I’m imagining a Warren Buffett like approach where companies are bought for their long term earnings potential rather than to take advantage of flux in their share price. These asset managers would most likely be private (ie not listed on the stock market) but probably provide information publicly and importantly they would have skills closer to private equity firms rather than fund managers with deep management and strategy skills in order to support the firms they buy.

I’m imagining they would be able to buy companies which are mature but don’t quite fit the current model of ‘exits’. Take Meetup or Etsy which were both funded through venture capital but also have strong social motivations baked into them — Meetup is part backed by impact investor Omidyar Network, and Etsy is a B-Corp. An acquisition by another company doesn’t make sense — if Google were to buy them, they’d probably lose the ‘community’ side of what they do — and an IPO would also be very risky — publicly listed companies are very volatile, especially when it comes to leadership (just ask Andrew Mason) and that also doesn’t fit with the ethos of the companies.

However if there was a shareholder who had a dual reason for owning shares combining getting a dividend over a long period of time and maintaining the social purpose of the company so that their own ethical stance is intact, I think that could work for everyone. The original founders and investors would get paid out and start investing the proceeds in the next generation of ventures and the new shareholders would get a stable, ethically sound return.

This of course has implications for the types of businesses that impact investors would back. In the same way as the venture capital business adapted after Sarbanes-Oxley to back companies that were ‘acquisition friendly’ rather than gunning for an IPO, if these ethical asset managers grow then impact investors will start to build companies that fit their needs.

The only alternative I can see is that we might see the growth of ethical stock markets and there’s some evidence of that happening. The two aren’t mutually exclusive, in fact they might complement each other nicely. But setting up new stock markets needs a critical mass while there’s nothing stopping a team just going ahead and creating something like I’ve outlined above. In fact, thinking about it, I’d be amazed if there aren’t people out there fundraising as I type.
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