Can the new trend of impact, or social, investing live up to the hype? That question was debated earlier this week in the New York Times, on the back of a report by the W.K. Kellogg Foundation about its, largely positive, experience of investing for social good as well as financial returns. Matthew is quoted discussing possible growing pains for the new asset class.
Certainly, if impact investing is going to fulfill its trillion dollar potential, as an asset class it needs to lure in not just overt do-gooders like philanthropic foundations but also mainstream institutional investors, such as pension funds. So what’s the bait?
A lot of effort is going into developing robust measurement of the social impacts of this type of investing, such as the IRIS standards of the Global Impact Investing Network, on the grounds that investors need to know if they are getting the benefits to people and planet for which they are putting their money at risk. So it was with interest that we heard of a new start-up, EngagedX, that is looking at the problem from the other end: proving that impact investing is financially rewarding.
EngagedX is the brainchild of London-based social entrepreneurs Karl Richter and Rupert Evenett. “Impact investment has had low visibility with institutional investors”, Richter warns, “because so far it hasn’t been able to express itself sufficiently well in financial terms. Our research shows that institutional investors and private wealth managers need robust benchmark financial data to meet with compliance and fiduciary requirements, if they are to allocate capital towards impact investing.” This reflects a widespread grumble among those trying to raise social and impact investing funds: that financial advisers, who have a strong regulatory incentive is to cover their backs, are reluctant to recommend something as untried as impact investing to their clients. Better financial data, Richter and Evenett believe, will help get impact investing over the ‘suitability’ hurdle that financial advisers have constructed.
It is early days for EngagedX – a beta index focused on the UK social investment market is planned for next year – but it is an idea that has backing from the British Government, the City of London, Big Society Capital (BSC) and, perhaps most importantly, a major bank. Social investment pioneer and chairman of BSC Sir Ronald Cohen notes that just as red in tooth and claw finance runs on the data that pours out of Bloomberg data terminal so “there needs to be a ‘Bloomberg’ for social investment.” This is not the sort of innovation to set the pulse racing, but building the measurement infrastructure for impact investing is essential if this new investment class is to achieve its potential to help build a better world.