SOCAP, the world's largest annual gathering of social entrepreneurs and impact investors, is always a welcome and energetic reminder that, even as the impact investing market matures, passion remains a driving force.
Social entrepreneurs have passion in spades, of course. They must - as anyone who has summoned the energy to start a business can attest.
However passion also shapes the work of many investors.
High net worth investors in the lead
I was reminded of the importance of passion earlier this year, while reading the excellent, comprehensive impact report out of RS Group in Hong Kong.
RS Group is the family office of Annie Chen. The report chronicles Annie's embrace of impact investing, along with her advisors, describing a tireless, creative, collaborative, and ultimately very personal journey.
The report shows just how challenging investing for social and environmental impact can be, but also just how profoundly rewarding. Reflecting on the financial crisis of 2008, and its impact on the course of her life, Annie writes:
Seeing the destruction and chaos caused by a combination of human greed, ineffective regulation and the pursuit of profit above all else, I was driven to ask: what is the purpose of investing? Is it possible to invest in a way that aligns with one's values? How can we ensure that our capital is deployed in a way that does not damage our planet or people, but actually contributes to their well-being? Can we "do good and do well" at the same time?
As I searched for answers, I realized that there was a whole other dimension to investing that I had not been aware of. All of a sudden, investing became a lot more interesting and meaningful to me, because it was no longer simply about making more money, but a way to manage capital with purpose.
This is the passion that drives many high-net-worth individuals like Annie to make impact investments and, through their collective efforts, to contribute to the growth of the field.
In 2012, family offices and high net worth individuals were reported to be the largest providers of capital to impact investing funds.
By 2015, family offices and high net worth individuals still supported the largest number of impact funds, although they had been surpassed in the sheer volume of capital provided by pension funds and insurers, banks, development finance institutions, and even retail investors -- showing just how successful the wealthy have been in unlocking additional sources of capital.
Surveys and interviews tell us something about the motivations of high net worth individuals. Barron's 2015 cover story on impact investing profiled three families convinced, like Annie, that capital markets must play a role filling the immense gap between the resources needed and those available for solving social and environmental problems.
Data from US Trust highlights some of the top reasons the wealthy own impact investments: first, it's the "right thing to do"; second, "corporate America should be held accountable for its actions"; third, individuals have "strong feelings for certain social, environmental or governance issues"; fourth, investors "want to make a positive impact on the world"; and fifth, "companies that are good citizens are less susceptible to business risks".
For institutional investors looking to high net worth individuals to shoulder the early-stage risk of impact fund managers, and for advisors to high net worth clients, understanding why and how the wealthy make impact investments is essential.
The RS Group Experience
The RS Group report provides a rare insight into the workings of a family office.
With a small in-house team, and support from a number of high-profile global advisors, including Jed Emerson and Ivo Knoepfel, Annie has succeeded in shifting over 90 percent of RS Group's assets into either "socially responsible" or "targeted impact" investments.The portfolio has been built in five stages:
- Developing a "Total Portfolio Policy Statement" outlining the overall purpose, asset allocation, performance targets by asset class, risk tolerance and liquidity requirements;
- Implementing a "core" and "satellite" approach, mindful of the need to balance the portfolio among investments that are more and less liquid, risky, diversified, and cost-efficient;
- Migrating liquid assets into core opportunities in the SRI space (now 61 percent of the portfolio);
- Moving the portfolio's remaining assets into satellite opportunities in the targeted impact space (now 30 percent of the portfolio); and
- Adding an explicit focus on climate change adaptation and mitigation.
The portfolio's financial performance has been competitive, with an annualized return of 5.0 percent over the five-and-a-half years to June 2015, compared to a custom portfolio-weighted benchmark of 5.2 percent.
And the portfolio's impact performance focuses on a blend of outcomes related primarily to climate change (e.g. 3.2 million MT of CO2 offset), underserved communities (e.g. of all clients served, 56 percent are located in low-income areas), sustainable agriculture (e.g. 8,251 acres of otherwise unproductive land under cultivation), and human and environmental wellbeing generally (e.g. 16,000 jobs created and 34,000 workers trained).
The RS Group report is an exercise in transparency, including the performance of all the portfolio's fund investments, and highlights a number of high-level lessons: the importance of networking with peers for the purpose of learning and leverage; of nurturing human capital given knowledge in impact investing still resides more with individuals than with institutions; of exploring a diverse range of responsible investment strategies and instruments; and, in RS Group's case, of being open to taking outsized risk in order to accomplish impact objectives, by anchoring investments in relatively new intermediaries and investees.
A Daring Proposition
Where there's passion, there's power. The RS Group report makes plain that investors like Annie are not turning back. On the contrary, their advocacy and influence will only grow stronger, and the evidence of what they have achieved more compelling.
Still, as the SOCAP conference gets underway, it is important to recognize the immensity of the task at hand in order to make RS Group's experience commonplace.
Think of how profoundly RS Group's journey differs from the path taken by the vast majority of investors. Tireless effort can mean higher transaction costs. Creativity can mean higher risks. A deeply personal effort requires a new set of soft as well as hard skills. Collaboration requires compromise.
Investors clearly want and need easier access to impact investing. In order to provide it, practitioners will need to double down on the all-out effort to develop additional data, knowledge, products, platforms, and intermediary capacity.
That's an intimidating and daring proposition, for which SOCAP's secret ingredient will be essential: passion.