The phrase “impact investing” was first coined by the Rockefeller Foundation in 2008. Whilst “socially responsible investing” goes back much further, the increasing importance attached to impact investing is a definite paradigm shift. Publicly admired figures such as Al Gore and David Attenborough have spoken passionately about the need to address the ecological problems facing the planet. Prominent business figures also address the subject with increasing urgency as for example Larry Fink, the CEO of the world’s largest asset manager Blackrock, who has stated that a corporation needs to “serve a social purpose”.
The importance of the last statement cannot be underestimated because it clearly shows that the corporate world is becoming focused on issues other than increasing shareholder value. UBS, the world’s largest private bank, raised $51m in 2015 for an impact investment fund of funds, $471m a year later and now plans to invest at least $5bn of private assets in this sector. Indeed, they have established a partnership with The Rise Fund, which is one of the most prominent players in the impact investment world.
The Rise Fund has established a new metric for impact investing based on the “impact multiple of money” and looks for a minimum “social return” of $2.5 for every dollar invested. This is clearly very different from a financial return and this new asset class clearly necessitates a new analytical approach. Historically, fund analysts have examined mainly financial data to value the performance of a fund. Whilst financial return will undoubtedly remain relevant for impact investments, new tools must be developed to evaluate social return.
If we take annual reports as a starting point, companies are increasingly obliged to supply social and environmental data. However, compared to the abundance of financial data this information is too generic to serve as a precise analytical tool. As next generation millennials start to become investors themselves, the calculation of social return will become increasingly important. As the 93-year-old David Attenborough makes way for the 17-year-old Greta Thunberg, one can predict that the emphasis will be more on ecological impact than financial return.
To address these fundamental changes, the investor world must not only identify projects that can provide a strong social return but also define how actually to calculate this return. A company developing a tool to promote education in the third world may have a low short-term profitability but a huge social return. This might not look attractive to an investor today but certainly might to a millennial in a few years’ time. The challenge will be how to calculate the real educational and social impact of the tool in order to make a convincing case to investors.
Investment companies need to start acting now to onboard the right talent and new skills necessary to succeed in a market which, according to JP Morgan, has the potential to represent up to a trillion dollars of invested capital within the next ten years (Global Impact Investors Network estimates the current amount of impact investment assets at $228bn). Universities and business schools have started developing courses based on impact investing and ethics. However, it will take several years for these students to graduate and contribute meaningfully to the sector. Furthermore, most of their academic studies will probably continue to be focused on conventional financial principles.
What therefore will be the background of the impact investment fund managers and analysts of the future? It is perhaps instructive to look at the management team of The Rise Fund, one of the most prominent and innovative players in the sector. The fund is divided into four “lead” sectors: food & agriculture, energy, education and healthcare, with a significant focus on the third and developing world. Whilst there will still be a need for technology experts and traditional financial modelling, the teams will also need to introduce skills in areas such as environmental studies, agriculture, urban development, green energy, micro-finance and ecology to name but a few. The soft skills will also be different with the emphasis more on collaboration and less on financial gain, perhaps finally enabling greater gender equality and the integration of more people from developing economies.
Whenever a new industry is born, there is a mis-match between supply and demand. Impact investing, just like fintech, is clearly a revolution in the financial services sector and recruitment methods will have to change accordingly. At Norman Alex we’ve already started identifying interesting candidates for this new talent pool and we’d be happy to share ideas with you. Please contact us for more information.