Impact investing continues to rise up the agenda. It was a hot topic at Davos with TPG’s Rise Fund (co-founded by Bono) getting airtime.
New impact funds are coming on stream weekly – in the past six months we’ve seen Barclays, Hermes and Standard Life launching impact funds in the UK. BlackRock’s CEO, Larry Fink, increased the stakes in his annual letter to CEOs earlier this month, stating that companies must demonstrate their positive contribution to society to maintain BlackRock’s support.
Despite this, many of my friends in the mainstream finance world are deeply sceptical. They believe it’s just marketing hyperbole—would these powerhouses really compromise financial returns (and risk losing clients) for the sake of doing some good?
The proof is yet to be seen. It’s too early, in a lot of cases, to see the financial performance of these funds and in terms of demonstrating the social impact, there’s very little good reporting practice out there. We’ll really know how serious BlackRock is and what it means by sufficient social impact when it starts divesting from companies it doesn’t believe meet these criteria.
But Fink is absolutely right in one respect. Companies do need to show their impact on the people and the planet—as do the funds that invest in them.
This ties in with the growing number of calls from organisations such as the GIIN, the Impact Management Project and Oxfam for greater transparency on both the financial performance and the social impact of investments. Perhaps it’s here that the grant-making world can lead by example.
We have been working for the past six months with Charly & Lisa Kleissner, analysing the social impact of their KL Felicitas Foundation (KLF). 100% of the foundation’s assets are invested with the aim of achieving social/environmental impact and market-rate returns for the portfolio as a whole.
The Kleissners are pioneers in many respects—being among the earliest impact investors and having helped build the required ecosystem—but most importantly, in they persistently purse transparency.
Their wealth advisors, Sonen Capital, published the financial returns of the Kleissners’ portfolio in 2013 and 2016. NPC reported on the impact of their portfolio in 2015. And this April, we will be publishing a joint report, displaying both the financial and social returns in one document—too rarely seen in this space.
The Kleissners should be applauded for being willing to bare all—good and bad. The overall portfolio has outperformed the benchmark since inception, although not all asset classes within have. They have made some successful exits from projects that have completed and returned the capital (plus interest).
The vast majority of their investments are delivering on their impact goals—although some have not been so successful, with a couple of enterprises no longer in business.
Details of all of the above will be laid out in the published report, with case studies of individual investments and illustration of how the portfolio contributes to the SDGs.
Impact practice among the KLF investees varies, as you’d expect from a portfolio that not only spans a range of asset classes; geographies; and themes, but also the entire impact spectrum from responsible (negative screening) investments; to sustainable funds focusing on best ESG practice; to highly targeted impact-first investments.
Some investees are excellent at measurement and reporting their impact. Others are less good. Some barely even acknowledging that they’re trying to achieve social impact.
To capture these differences, we have created a framework, the Impact Risk Classification, to assess and compare each investment’s impact practice, whatever its asset class, wherever it lies on the impact spectrum. We hope that frameworks such as this, and others being simultaneously developed, will promote greater transparency on the impact being sought and achieved by investors and investees.
In time they should become influential in determining where impact funds go and therefore ensuring that impact investment really does produce social impact even where market returns are desired.
At some point we may need a charter, or code of conduct, to be created on the back of these frameworks—one all impact funds need to adhere to in order to justify their name.
Only once we have enough evidence of both social and financial returns from these investments, demonstrating the integrity of their impact, will the sceptics be won over.
Plum Lomax is a Philanthropy Lead with New Philanthropy Capital (NPC).