Over the past six months, we have worked together to better understand the important issues affecting scale in impact investing. One of the critical issues we have heard time and time again, from potential investors and from some fund managers, is the need for better data.
Okay, so it’s not quite as exciting as the “show me the money” line from Jerry McGuire. But for the emerging impact investing industry, showing the (financial return) data is an important precursor to getting shown the money.
While much of the conversation within the impact investing industry has focused on the important issue of the appropriate metrics to measure impact, far less attention has focused on metrics for evaluating financial returns. If we truly want to see the impact investing industry grow beyond today’s early pioneers to a broader set of investors, getting a better handle on the data around actual financial performance is critical.
Having spent a fair bit of time in both the impact investing community and in the more “traditional” investment world, the two who communicate often seem to be speaking completely different languages – and it’s time to get on the same page.
Returns are the lingua franca of how people invest. Investors are accustomed to seeing return data – whether it be in internal rate of return (IRR) or multiples — by asset class, and then evaluating that performance relative to broader benchmarks. Investors want to understand the risk associated with generating that return, whether in the form of loss rates on a debt portfolio or volatility in an equity portfolio. More importantly, they need a baseline from which to start.
In terms of public equities, we have a robust data set that enables us to evaluate the performance of companies that are seeking both a financial and social return, and the findings are different from the conventional wisdom. According to a recent report from UBS, an “enormous amount of academic research has been published about the financial performance of sustainable investing funds over the past decade. The literature concludes that sustainable investing strategies perform in line with market benchmarks.” The UBS report goes on to suggest that “ESG [environmental, social and governance] or socially responsible investing (SRI) funds are not consistently suffering the ‘return sacrifice’ so often heard in discussions of sustainable investing.”
However, very little data is available on impact investments in private companies. We recognize the challenges: it is harder to access data from private companies; impact investments are relatively recent; there are few funds with fully realized track records; and investments are dispersed through a broad set of investors and intermediaries.
Despite these challenges, capturing the data is important as we seek to bring the impact investing industry beyond the pioneering stage. I have personally seen the power of data in convincing skeptics. Prior to launching the Impact Investing initiative at the Small Business Administration, many questioned whether the program would have too much risk. The conventional wisdom was that investing in low and moderate income (LMI) areas was more risky and had lower returns.
So we ran the numbers – and found that the conventional wisdom was wrong. We literally ran a regression to see how financial performance correlated with the percent of a fund invested in an LMI area. We found no correlation. Investment in “low and moderate income” areas did as well as their peers.
We don’t know what the numbers will show for impact investing more broadly. Since impact investments are not one monolithic group, my guess is that in some sector/asset class combinations, they will compare favorably with “market” rates. In many cases they may be below.
But getting the numbers is an important first step. Even in cases where expected return may be “concessionary,” the data could clarify to the investor that the risk may be low (addressing the investors’ concern for capital preservation) or that the total blended return, financial and social, could be incredibly compelling. Transparency and baseline data will help the sector move from hype to scale.
The analysis will be important not just for the numbers per se, but for investors to see that the impact investing community “speaks my language”.
The Global Impact Investing Network (GIIN) has made some good progress in initial research, but there is more work to be done. We need to differentiate returns by asset class, look at loss rates, and the volatility of investment and not just returns. We need to work together to take this to the next level.
Heading to the Social Capital Markets (SOCAP13) conference next week? We invite you to join us to continue the conversation during a session featuring with our CEO, Jean Case, and for an in-depth workshop with Sean Greene and Sonal Shah. See the full schedule of events HERE.