IMPACT INVESTING
P.V. Viswanath
Learning Goals
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What is Impact Investing?
Why should we be interested in Impact Investing?
What are Impact Ratings?
How can a socially responsible investment be
created and managed?
Why Impact Investing
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There are positive and negative externalities that need
to be internalized in some fashion.
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Impact Investing can be a partial solution to such
internalization, by making it valuable for companies to be
socially responsible – in this way, the conflict between
shareholder wealth maximization and social wealth
maximization disappears.
Government Policies Matter
Social Attitudes Matter
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Impact Investing can raise social consciousness about the
impact of government policies and social attitudes.
Income Inequality: Factors
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The Census Bureau reported in 2012 that the median white household held a
net worth of $110,729 in 2010, while the median black household held a net
worth of just $4,995. Here are some of the factors:
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Homeownership
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Income
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The black unemployment rate was 13.8 percent in January, while the white unemployment
rate was only 7 percent, according to the Labor Department.
College education
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The average white person's income was $29,401 per year in 2011, while the average
black person's income was just $18,357, according to the Census Bureau.
Unemployment
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White households are 28 percent more likely to own their home than black households,
according to the study.
Roughly 29 percent of whites age 25 and older held a bachelor's degree or graduate
degree between 2006 and 2010, compared to only 18 percent of blacks in the same
age group, according to the Census Bureau.
Inheritance
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Whites were five times more likely to receive an inheritance than blacks between 1984
and 2009, according to the Brandeis study.
Underlying factors requiring policy
action: Home ownership
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Opportunities and barriers in workplaces, schools and
communities that reinforce deeply entrenched racial
dynamics in how wealth is accumulated.
Homeownership has a huge racial component. Racial
segregation by government design and often enforced by
federal agencies like the FHA lowered demand for homes in
black neighborhoods, reducing the equity black homeowners
could accrue.
Because whites are five times more likely to inherit money
than blacks, or otherwise help family members with downpayments, whites on average bought homes and started
building equity eight years earlier than African-Americans,
generally with lower lending costs.
Underlying factors: education
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Factors that should help everyone helped whites far more
than blacks. For example education: "Similar college
degrees produce more wealth for whites."
A number of factors contribute to this, including the fact that
African-Americans are more likely to graduate college
burdened by debt.
Solutions:
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We can enforce lending standards and fair housing policies to
lessen the effects of segregation and predatory lending.
We can help low-income families and families of color attend
college and graduate without massive debt.
We can use the minimum wage and equal pay provisions to
reduce the income gap, and strengthen employer-based
retirement plans.
Impact Investing vs Socially Responsible
Investing
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Impact investments aim to solve social or environmental
challenges while generating financial profit.
Impact investing includes investments that range from
producing a return of principal capital (capital
preservation) to offering market-rate or even marketbeating financial returns.
Impact investing is a kind of "socially responsible investing."
However, impact investors actively seek to place capital in
businesses and funds that can harness the positive power of
enterprise.
In contrast, socially responsible investing often involves
negative screening, which focuses primarily on avoiding
investments in "bad" or "harmful" companies.
Need for Social Impact Ratings
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Philanthropy and socially responsible investing work
differently from investment for financial profit.
In the case of investing for financial profit, the capital market
provides signals as to the desirability of the investment, to
the extent that the capital markets are efficient.
In socially responsible investing, investors need to obtain
signals of how good a given company is from the point of
view of its social impact.
Furthermore, different donors might care about different
social issues – one donor might worry about the environment,
another about poverty eradication, a third about health.
Social Impact Ratings provide a way to enable efficient
capital allocation in the non-profit and socially responsible
investment sector
Social Ratings for MFIs
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Because an MFI is often a non-profit institution, and even if it is a for-profit
institution, its business is inextricably tied up with social issues, MFIs have a
double bottom line.
Hence, MFIs, as well as their donors/investors need to have information
about the MFIs social ratings. is that
One such system of ratings is that of Microrate; it has a system of social
ratings for MFIs, similar to its financial ratings.
MicroRate’s social ratings measure the social performance of microfinance
institutions (MFIs). A social rating not only provides an independent analysis
of an MFI’s social performance but goes deeper to evaluate an MFI’s social
results and social commitment within its context. (Microrate website).
However, impact investors target a variety of investments, not limited to
MFIs. Hence a variety of rating services have come up that evaluate the
social impact of any organization, including for-profit corporations. In this
case, the corporation itself might not have any explicit social objectives.
However, its activities might lead to a high or low social impact, which
would be of interest to impact investors.
Social Impact Ratings for Companies
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There are several systems/providers of social impact
ratings
the Total Social Impact Foundation’s TSITM Ratings for S&P
500 companies (uses a numerical score up to 20)
 Reputex Ratings & Research Services’ ratings for Australian
companies (uses a letter category system ranging from AAA
to D)
 dotherightthing Inc. ratings for specific events involving a
given company (use a numerical range from +5 to -5
 Other research providers offer a narrative assessment of a
variety of social impact criteria for rated companies.
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http://www.ethicsworld.org/corporatesocialresponsibility/PDF%20links/Cosgrove%20paper%202.pdf
Social Impact Ratings for Companies
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In September 2011, GIIRS, an impact ratings system was launched
at the Clinton Global Initiative. GIIRS has been marketed together
with IRIS, a set of metrics and PULSE, a tracking system.
GIIRS
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IRIS
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GIIRS (which stands for the Global Impact Investing Ratings System) is a
comprehensive and transparent system for assessing the social and
environmental impact of companies and funds with a ratings and
analytics approach analogous to Morningstar investment rankings and
Capital IQ financial analytics
IRIS is a set of standardized metrics that can be used to describe an
organization’s social, environmental, and financial performance.
PULSE
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PULSE helps track and benchmark financial, operational, environmental
and social data to better demonstrate impact.
Social Impact Headings Used by IRIS
Access to clean water
Access to energy
Access to financial services
Access to education
Access to information
Affordable housing
Agricultural productivity
Capacity-building
Community development
Conflict resolution
Disease-specific prevention and
mitigation
Employment generation
Equality and empowerment
Food security
Generate funds for charitable giving
Health improvement
Human rights protection or
expansion
Income/productivity growth
IRIS Environmental Impact Headings
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Biodiversity conservation
Energy and fuel efficiency
Natural resources conservation
Pollution prevention & waste management
Sustainable energy
Sustainable land use
Water resources management
Portfolio Issues with Ratings
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A Portfolio Social Impact Rating can be calculated
simply as the weighted average social impact rating of
the companies represented in the portfolio.
Some issues that could make this calculation more
complicated are:
Should equity and debt investments should be treated in the
same manner
 Should short positions should offset long positions in
calculating social impact ratings
 How should derivatives be treated?
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Building an Impact Portfolio
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Organizational Structure
Separate team: Some impact investment portfolios are
managed by a separate team operating alongside
program officers responsible for grant-making (e.g.
Rockefeller Foundation)
 “Hub-spoke” partnership: The social impact aspect is an
overlay to the portfolios they manage; there is a
partnership between a centralized team and the individual
portfolio management teams (e.g. TIAA-CREF.)
 Whole institution: Many asset managers, have their entire
institution dedicated to impact investments and split out the
portfolios by instrument, sector or asset type (e.g. MicroVest,
a US-based fund manager with portfolios separated by
instrument type (debt and equity).
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Based on “A Portfolio Approach to Impact Investment” by Yasemin Saltuk, JP Morgan
Impact Thesis
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The impact thesis is the investment philosophy of the
fund/organization.
This will usually include these elements:
A target population, which could be defined by income
level, degree of inclusion or access, or other characteristics.
Examples might be BoP, underserved areas, rural areas,
specific countries etc.
 A target business model of impact delivery, which focuses
the investment opportunity set on certain business models
 Target impact, which can be measured to determine the
success of the intervention
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Target Business Model Specification
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For example, Global Easy Water Products is interested in energy
and natural resource efficiency. Its business model involves a retail,
low-cost for-profit approach that delivers technological
advancements in irrigation directly to farmers.
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GEWP is a for-profit social enterprise in India that focuses on
developing and delivering low-cost irrigation solutions to small farmers
who are often overlooked by technology advancements. GEWP’s mission
is to distribute products that help smallholder farmers to increase their
available income, improve their nutrition and earn their way out of
poverty. The company’s portfolio contains over 50 different products
primarily in drip tape, micro sprinklers, fertilizer tanks and flexible
water storage tanks
Alternative business models might include suppliers or distributors
from the target population in the value chain, such as utilizing
informal retail franchises for distribution.
The investor might have preferences among these business models.
Target Impact Specification
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Examples of target impact are:
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Number of target population reached
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Percent of business reaching target population
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Cost-effective expansion of product/service delivery; Shell Foundation aims to act as a
catalyst in the very early stage by proving business models that can be replicated at a
large scale
Quality of outputs
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Minimum percentage of customers in target population; e.g. The Africa Health Fund
managed by Aureos has set development targets according to the percentage of BoP
clients served by portfolio companies
Scale of outputs
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Number of customers, e.g. LeapFrog Investments aims to reach 25mm low-income and
underserved people worldwide
Improved quality of products/services available; e.g. D.Light provides energy and
lighting solutions to households without access to reliable electricity
Pioneer
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Addressing a gap in market for which there are few alternatives, e.g. Root Capital
provides capital to "the missing middle” (enterprises underserved by either microfinance
and commercial banks)
Combining risk-return and social impact
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The investor then has to combine the standard risk-return
dimensions with the social impact dimension.
For example, an investor might have the following profile:
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Impact: targets businesses that deliver products and services to
underserved communities while meeting a high-standard of
employment and resource efficiency practices
Return: seeks to balance asset income and asset appreciation
Risk: seeks a balance between ecosystem risk and investment risk
One thing we see here is that there is an element of risk
even in the evaluation of social impact.
While this particular framework puts social impact risk and
investment risk in the same category, it may make more
sense to create an efficient frontier for social impact that
involves expected social impact and associated risk factors.
Other Issues
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Other issues that have to be addressed regarding the
recipients of funding are:
Mission Drift: There is also the risk that investees drift away
from their intended mission without the approval of investors.
This is a risk among traditional fund managers more
generally since managers can be tempted to invest in
sectors outside of their mandates when attractive
opportunities arise or yields in their designated assets
become less competitive.
 Moral Hazard: because the investor is explicitly focused on
helping the recipient of the funding, it will be even more
difficult to enforce loan covenants or submit a claim on
assets than would be the case for a traditional lender.
 Instruments: Grants versus investment capital
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