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February 12, 2010
Book Review: Solutions for Impact Investors: From Strategy to Implementation
by Robert Kropp
Authors Steven Godeke and Raul Pomares seek to provide an investment strategy that can combine
social impact with financial returns.
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Published in November 2009 by Rockefeller Philanthropy
Advisors, the monograph Soluti
ons for Impact Investors: From Strategy to Implementation asserts that the “sharp dichotomy
between profit-maximizing financial investment and ‘give-it-away’ charity is gradually losing its
edge.”
Authors Steven Godeke and Raul Pomares choose the term “impact investing”
to describe a dual investment goal of producing a socially beneficial impact while seeking an
appropriate investment return as well. Although investment strategies among impact investors may
differ—the range of strategies can extend from those that seek to optimize financial returns to
those that prioritize social or environmental benefits—a “well-considered investment strategy and a
rigorous execution process” is essential for success, whatever the investment approach.
Central to the authors’ prescription for a successful impact investing strategy is the
development of an impact investing policy. Before such a policy can be developed, however, the
impact investor must establish a strategy. The strategy includes an articulation of values, in
which the impact investor determines the issues to be targeted, the people or organizations that
will implement the strategy, and the impact investor’s tolerance for risk.
The authors
provide examples of successful articulation of values in an impact investing strategy by referring
to the efforts of three established organizations.
RSF Social Finance is a nonprofit financial services
organization with over $130 million in consolidated assets. Its three investment options whose
funds support innovative social enterprises in food and Agriculture, education and the arts, and
ecological stewardship.
KL
Felicitas Foundation maintains an investment strategy that it terms Sustainability, Mission,
and Social Investments (SMSI), in which sustainability metrics like workplace, community, and the
environment are evaluated. According to the Foundation, its investment strategy seeks “financial
returns approximating the average risk adjusted returns of similar investments made without regard
to sustainability, mission or social considerations.”
The Calvert Foundation, a nonprofit organization, uses
investment capital to make community investment an option for investors seeking to make a positive
social impact.
In each of these three cases, the authors write, the organization developed
an impact investment mission, chose its partners and advisors, and used this groundwork to apply
such tools as asset allocation and portfolio theory to its investment process.
Central to
the development of an impact investing policy is asset allocation, in which a portfolio is
constructed of investments in different asset categories. The categories include stocks, bonds, and
cash, as well as alternative investments. “By diversifying investments across several asset
classes,” the authors write, “Investors may reduce risk and volatility while pursuing their return
objectives.”
Asset allocation can be as diverse for the impact investor as it is for
mainstream investors. In an example provided by the author, the environmental impact of investing
in public equities can be tempered somewhat by the fact that most large companies maintain multiple
business lines. Some groups within a corporation contribute more to greenhouse gas (GHG) emissions
than others, and while investment in large companies may reduce risk, doing so could also reduce
the effectiveness of the environmental impact sought by the investor.
On the other hand,
investment in clean tech venture capital offers the opportunity for much greater purity of
expression of an investment theme, but exposes the investor to the far greater risk associated with
investment in illiquid and/or early stage companies.
For the most conservative investor
who considers even public equity exposure to constitute too great a risk, appropriate options for
addressing climate change may be green bonds, or cash deposits in green banks.
In any
case, the authors state, opportunities for impact investing throughout all asset classes have grown
in recent years, and can be expected to continue to do so.
In addition to asset allocation
strategies, components of an effective investment policy statement should include a statement of
purpose, the roles of those responsible for impact assessment—especially if, according to the
authors, “external resources will be utilized in generating deal flow, due diligence, portfolio
recommendations and reporting”—and documentation of performance benchmarks.
Once an impact
investing strategy has been designed, the investor then implements and maintains an investment
strategy. As with asset allocation, the authors see the generation of deal flow as an evolving
process in which new “offerings to harness the scale and power of capital markets to deliver
solutions to the social and environmental challenges faced by society” are being developed.
Following the generation of deal flow, the due diligence process addresses the impact risks of
potential investments, as well as the mitigation of those risks. Important considerations include
the mission-alignment of management and the governance structure of the fund or company in which
investment is contemplated.
Finally, relevant impact assessment systems that can be
compared to other investors’ performance should be created, because at present investors have too
little data with which to assess and compare the non-financial performance of funds and companies.
In conclusion, the authors state, “Impact investing is not charity. It requires and
demands every bit of the same disciplined approach currently being applied to traditional investing
if it is to succeed.” Whether the intent of the investor leans toward financial returns or social
impact, better standards of investment management best practice must be developed.
That
said, opportunities for impact investing are growing in all asset classes. “Impact investing,” the
authors write, “For all its challenges, may ultimately prove to be the most prudent form of
investing.”
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