The process of mainstreaming impact investing is, quite literally, about asking the right questions, and having the right answers ready to provide.
On the buy side, where the questions originate, investors including pension funds and other fiduciaries are wrestling with what it means to invest sustainably; a difficult proposition in the face of rigid and sometimes fallacious legal and financial conventions.
And yet progress is being made -- first, on more clearly articulating investment theories and policies, typified by the growth of the United Nations Principles for Responsible Investment (UNPRI); and, second, on investors playing a more active role generally, by engaging with investees and becoming more demanding of service providers. Over 90 percent of institutional shareholdings were voted on during the latest proxy season in the U.S.
When it comes to framing the right questions, however, the biggest recent news was out of California, where the country's largest public pension fund, CalPERS, released a must-read draft of nine new, core investment beliefs, including the following four:
- A long-time investment horizon is a responsibility and an advantage. The draft requires that CalPERS encourage companies and external managers to consider the long-term impacts of their actions and favor investment strategies that create long-term, sustainable value;
- CalPERS investment decisions may reflect wider stakeholder views, provided they are consistent with its fiduciary duty to members and beneficiaries. CalPERS names its primary stakeholders as members/beneficiaries, employers and California taxpayers;
- Long-term value creation requires effective management of three forms of capital: financial; physical; and human. Governance is identified as the primary tool for aligning the interests of CalPERS and the managers of its capital;
- Risk to CalPERS is multi-faceted and not fully captured through measures such as volatility and tracking error. This belief states that, as a long-term investor, CalPERS must consider risk factors that emerge slowly over long time periods, but could have a material impact on company or portfolio returns, such as resource availability.
The developments at CalPERS are foundational in positioning institutions to make the ask, according to Allan Emkin, Managing Director at Pension Consulting Alliance and an advisor to the fund's board of trustees. "With the adoption of these beliefs CalPERS is taking a leadership role on integrating sustainability across the investment platform," he wrote to me earlier this week.
Finding the right "answers", meanwhile, is a job for the sell side; dedicated intermediaries methodically working to design an institutional-quality menu of products.
The priorities for this group include financial innovation (i.e. the role of structured products and catalytic capital from investors with more flexibility like governments, philanthropic foundations and high net worth individuals), figuring out once and for all what it means to invest with intentional impact, and cultivating public private partnerships.
The buy side and sell side conversations are necessarily distinct, although they are increasingly coming together in impactful markets that are already scalable, including municipal bonds, sustainable real estate and urban development, agriculture and forestry, clean tech and renewable energy, infrastructure, "emerging manager" programs that direct capital to SMEs in minority and other underserved communities, and most recently microfinance.
It is into this landscape that a new report on impact investing from the World Economic Forum arrives, From the Margins to the Mainstream.
The report offers some useful new findings -- and an excellent synthesis of the specific challenges for larger institutional investors in deploying capital to impact investments that tend to be smaller, unconventional, and relatively untested. These insights are drawn in part from a survey of U.S. pension funds that found that, while only 6 percent of respondents had made impact investments, 64 percent expected to do so in the future.
The report also makes some notable recommendations -- to funds, be transparent; to foundations, be bold; to government, be part of it; and to intermediaries, most compellingly, be innovative in aggregating performance data, aligning the buy and sell sides, and creating baseline principles for defining the practice of impact measurement.
From the Margins to the Mainstream makes an important contribution. As the Forum credibly explains: "what makes this report different is the World Economic Forum's access to the senior most decision-makers and portfolio managers of the largest and most innovative investors in the world."
What we must acknowledge, however, is that the parallel conversations about questions and answers are no substitute for real equilibrium.
To the contrary, power is quite clearly on the buy side. So long as there are early indications of reasonable performance in key markets, demand for product will drive supply, particularly from the blue ribbon intermediaries already on the books. The reason Morgan Stanley and Goldman Sachs have become active in impact investing is primarily because their clients want them to be; a typical narrative at the retail end of the market that is yet to be replicated on an institutional scale.
What impact investing needs is for all investors to ask the question of their asset consultants, advisors, or internal staff: "Tell us, concretely, what we can we do to proactively align our investments with the urgent social and environmental risks and opportunities that are materially impacting us, our institutional mission, and our members, whether we like it or not?"
Guiding asset owners to ask this and its derivative questions must be the most urgent priority for those with the influence to drive a mainstreaming agenda, first among them the World Economic Forum. It is encouraging to see the Forum stepping into this role. Kudos also to the Global Impact Investing Network for an inaugural GIIN Investor Forum agenda that hits directly at the same theme.
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