Case Study: Getting to a 100% Impact Portfolio
May 13th, 2019 | Jory Cohen
Over the past ten years we have seen the Impact Investing industry define and redefine itself a few times. In many regions, Impact Investing is known to encompass all forms of Responsible Investment strategies across asset classes.
But in Canada, the idea tends to fracture along asset class lines with “Impact Investing” referring to private market investments and “ESG” and “SRI” strategies referring to public market investments.
Like any pre-teen, Impact Investing currently sits on the edge of youthful maturity. Canada might be described as a “late bloomer” compared to some global comparators – less mature, with fewer investment options and less capital committed. Impact investing enters adolescence charged with emotion, fueled by nascent growth and ready to change the world. Skepticism remains high among those “older and wiser”, who dismiss impact investing as youthful exuberance. But they continue to underestimate the potential of the massive intergenerational transfer of wealth and the difference in priorities of the recipient generation.
So how will this young industry prove itself and mature into the change-making adult that we desperately want it to be?
Focus on the Impact, Not the Name
Regardless of what you call it, the fundamental premise is the same. Both retail and institutional investors increasingly want to drive positive social and environmental change with their investments, in all asset classes. Investors don’t care if we call it “Impact”, “Responsible”, “Sustainable” or otherwise. They do care about and will continue to demand options across asset classes. Investors want compelling investment opportunities that deliver returns and impact. They don’t want to listen to complicated jargon or be limited by asset class.
Yes, creating proper naming conventions is important, if it doesn’t get in the way of investing.
Build Impact Products and Strategies
To date Impact Investors have focused primarily on private equity and private debt as they explore this emerging space. Many impact investors also include alternatives such as social purpose real estate, green infrastructure and agriculture in their portfolios. The next frontier of impact investing is undoubtedly public equities. Innovative investment managers are building customized portfolios of high impact public equities focused on areas such as fossil fuel free, green energy, gender lens, board diversity, and social justice, to name a few. These are not simple ESG or SRI strategies, they go far beyond negative screening, best in class and ESG risk analysis.
They are looking for the intentionality of social or environmental impact baked into the DNA of the investee company and then measured. However, customized portfolios for accredited private investors and foundations alone will not achieve the scale of change we seek. For impact investing to “go mainstream” we need financial institutions and asset managers to integrate this thinking into products for both retail and institutional investors.
Measure the Impact
Impact measurement is the subject of much debate. Impact investors are divided on the theory, frameworks and whether it is necessary. On the more sophisticated end of the spectrum, investors have built detailed impact measurement frameworks supported by IT systems and linked to financial and strategic reporting. On the other end (and more commonly), investors have a hard time tracking a handful of impact metrics consistently. We are seeing traction with global frameworks such as IRIS and the Sustainable Development Goals (SDGs), which are key to building commonality of measurement between investors and investees. We will continue to see a variety of approaches to impact measurement based on capacity and perspective. What is important is that we measure impact in some way and continue to make the case for incrementally more impactful investments.
Impact Investing Infrastructure
As impact investing grows it needs to be supported by strong mentors and role models to reach its full potential. Impact investing can benefit immensely by leveraging the platforms, systems and distribution channels that mainstream finance depends on. Finance and investment professionals, investors, entrepreneurs, we are counting on your wisdom, your support, your ingenuity and your open minds. Impact investing is the future generation of investing. Invest in its success.
Growing up is hard. It is awkward and flawed, paradoxically characterized by insecurity, and over-confidence. Yet with youth comes clarity, fresh perspective and innovation. Impact Investing in Canada is poised to make lasting social and environmental change, but it first needs to break out of childhood and charge into maturity.
The path there will not be linear, but for the sake of ourselves and generations to come, it’s important that we press on. Determination, iteration and bias to action will see impact investing mature. We will see impact considered deeply across all asset classes, in a multitude of products and strategies. We will have depth of service offerings and asset management. And most importantly, as a result, we will have the positive impact we aspire to have. This tween will be an adult sooner than we think!
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Kelly Gauthier
President
Rally Assets
