Metrics
Money Managemeent Institute and Burckart Consulting

Impact investing needs a better way to measure impact

Burgess COMMENTARY

Peter Burgess

Impact investing needs a better way to measure impact

Impact is complex. (Reuters/Marcelo del Pozo)

In places where electricity is scarce or unreliable, kerosene lamps are a standard lighting source—but the fumes from burning kerosene pollute the air and kill 1.6 million people each year. D.Light Design, a private company based in San Francisco, manufactures inexpensive solar-powered lamps and sells them cheaply around the world. It is safe, reliable, and renewable energy available for about the same cost as a few candles. D.Light believes that it’s not only reducing pollution, but also improving health, safety, and performance—in school, productivity, and income.

This is a perfect example of an impact investment: the company is turning a profit while meeting a social need in an environmentally-sustainable way. And with support from firms like BlackRock, Merrill Lynch, and Bain, impact investing is no longer a fringe movement.

Yet it also sits on the cusp of mainstream wealth management, because we haven’t done a good enough job of demonstrating impact. D.Light, for example, can easily report how many lamps were sold (over 9 million), but capturing the wider impacts on health, education, and the economy is more challenging. Without hard numbers to offer investors and their advisors, impact investing is a tougher sell. Better tools exist; if we used them, impact investing could, well, make more of an impact.

Surveys consistently show that Gen Xers and Millennials rank what their investment will do over how much they’ll make. They want to be more involved in their investments than the old charitable giving model of “making money and giving back” (personified by Bill Gates and Warren Buffett) allows. They want their investments and philanthropy to be nearly indistinguishable.

Financial managers are the gatekeepers to impact investments, yet our research shows that they don’t really understand what it is, won’t bring it up to their clients, and don’t place any value on learning more about it.

Even managers who are aware of impact investments are wary to suggest them, for lack of metrics. In a new report released by the Money Management Institute entitled “Bringing Impact Investing Down to Earth: Insights for Making Sense, Managing Outcomes, and Meeting Client Demand,” (pdf) we report that addressing these limitations would help advisors to better satisfy their client’s growing demand for impact investing.

For one, we should be using the tools and firms the non-profit sector relies on to evaluate their programs and communicate outcomes. Sometimes it’s as simple as setting clear, long-term objectives and getting the right information technology to capture certain data.

D.Light, for example, combines sales data, customer feedback, and ongoing field evaluations of its lamps to measure impact on health and productivity. And the Global Reporting Initiative, Impact Reporting and Investment Standards, and Global Impact Investing Rating System are now used by impact investors to measure the non-financial performance of their investments. Bloomberg, Thomson Reuters, and MSCI have also begun to offer environmental, social, and governance research data to help with investment analysis.

These metrics are good because they move beyond numbers, but they still don’t account for context. For example, there’s no accounting for the time and place of an investment (say, investing in the energy sector but not education opportunities in Egypt, pre-Arab Spring) or the type and timing of capital deployed (say, mortgage-backed securities in 2007). And they don’t look at what else the company might be doing, which could have an equal and opposite impact.

Take Walmart, the largest retailer in the world. It has been installing solar panels on store roofs, generating two times more renewable energy than its closest commercial solar power competitor (Kohl’s), and more than that of 35 states and the District of Columbia combined. But even if an investment in Walmart might decrease carbon emissions, it may also create an increase in low-wage jobs, which is a negative impact many investors with social impact preferences would prefer to avoid.

Investors and their advisors need to demand (and help pay for) better data on an investment’s holistic impact, and companies need to gather it.

Meanwhile, advisors don’t have to wait for more data to change their ways. The new investor is less interested in numbers than in meaning. In other words, advisors should think about why most potential investors want to invest—what is their ultimate goal? Perhaps they want to save for retirement, or maybe they want to save for a child’s college tuition.

Would-be impact investors think about goals on the other side as well: they want to invest in, say, the standard of living for women entrepreneurs in India, or moving more children out of poverty in Washington DC. Perhaps they are interested in a microfinance company. They don’t necessarily care how many loans were extended—what they want to know is: did those loans enable families to stay in their homes; did it facilitate better education for their kids; did it change their quality of life?

If financial advisors saw their role as initiating a more meaningful conversation along these lines, they could work backwards to find the impact investments that align with their clients’ goals. There are so many ventures doing good in the world, working to address major issues like climate change, rising inequality, and scarcity of resources. We will get more capital to them not only by measuring impact, but by valuing it.

Follow William on Twitter @BillBurckart. We welcome your comments at ideas@qz.com.

July 7, 2015 Report Released: Bringing Impact Investing Down to Earth ... Insights for Making Sense, Managing Outcomes, and Meeting Client Demand

We are thrilled to announce the release of this new special report entitled Bringing Impact Investing Down to Earth: Insights for Making Sense, Managing Outcomes, and Meeting Client Demand, which continues a multi-year discussion between the Money Management Institute (MMI) and Burckart Consulting about the emergence of impact investing and the peculiar challenges and opportunities it represents for the financial services industry.

The report details the growing client demand for impact investing – the practice of investing with the intention to generate measurable social and environmental impact alongside a financial return – and the obstacles to truly widespread adoption. Chief among these is the need to address issues related to transparency.

Read the launch op-ed on Quartz: 'Impact investing needs a better way to measure impact'

Also included are essays by leading practitioners who are learning by doing – Erika Karp and John Wilson of Cornerstone Capital Group, Jamie Butterworth of Circularity Capital, Mark Sloss of UBS, and Anna Snider of Merrill Lynch.

The collaboration between MMI and Burckart began in October 2012 with a showcase Burckart conducted on impact investing for attendees at MMI’s Fall Solutions Conference in New York. Subsequent activities have included:

The launch of an ongoing Impact Investing Blog on MMI’s website in July 2013;

• A panel at the MMI Annual Conference in April 2014 (New York, NY), during which Burckart was joined by Amy Bell, the Executive Director and Head of Principal Investments for JPMorgan’s Social Finance unit; Joel Hornstein, the Managing Director of DreamFund; and Mark D. Sloss, the Senior Portfolio Manager and Head of Premier Portfolio Services for UBS Wealth Management Americas;

• MMI’s publication of the special report “Serving Client Demand for Impact Investing: A Hands-on Guide for Financial Advisors and Senior Management” in May 2014;

• A MMI webinar in May 2014 that revisited the well-received impact investing panel discussion from MMI’s Annual Convention; and

• A panel at the MMI Annual Convention in April 2015 (Charlotte, NC), during which Burckart was joined by Anna Snider, the Managing Director and Head of Global Equity Due Diligence for Merrill Lynch Wealth Management; John Streur, the President and Chief Executive Officer of Calvert Investments; and Gil Crawford, Chief Executive Officer of MicroVest.

The report also draws from Burckart’s advisory work and industry knowledge, reviews of client engagements, data analysis and desk research, and targeted interviews with leading financial institutions and advisors.

Other outreach Burckart has conducted in support of this body of work has included:

• Coverage in Quartz in 'There's a new industrial revolution underway', with Jamie Butterworth;

• Coverage in Quartz in 'Can capitalism keep people out of prisons?', with Steven Godeke;

• Coverage in Forbes of Bringing Impact Investing Down to Earth;

• An interview with FundFire on Bringing Impact Investing Down to Earth;

• A speech and panel on March 25, 2015 as part of a webinar in partnership with the Clinton Global Initiative (CGI) that served to preview the report, Find more details here. Burckart was joined by Nicholas Salter, Senior Manager for the Clinton Global Initiative; Anna Snider, the Managing Director and Head of Global Equity Due Diligence for Merrill Lynch Wealth Management; and Mark D. Sloss, the Senior Portfolio Manager and Head of Premier Portfolio Services for UBS Wealth Management Americas; and

• A speech and a panel on “Financing our Market and Community Innovations” at the 30th Annual Emerging Issues Forum: Innovation Reconstructed in February 2015 (Raleigh, NC), where Burckart was joined by Dan Nissenbaum, Managing Director, Urban Investment Group, Goldman Sachs Bank USA; Scott Case, Chief Executive Officer, Main Street Genome; and Jenny Kassan, CEO, Cutting Edge Capital.