Impact Investing is Losing Itself
From Rick Segal, Chairman of ReThink
Impact Investing has spent the last decade or two operating on the fringes of mainstream investment, with a total market cap of about $60 billion. In the last few years it caught Wall Street’s attention. Major banks began indulging the idea of putting impact products on their platforms to meet with investor demand, dangling the promise of previously-unthinkable growth, which the Global Impact Investing Network estimates could climb as high as $2 trillion. But that offer came with a caveat: Impact needed to learn how to more clearly codify its outputs. Wall Street, if nothing else, likes a scoreboard.
Ratings agencies and other independent validator firms rushed to fill that void – ‘How many jobs did Company X create?’ ‘How many students did Company Y serve?’ – purporting to provide a framework by which to compare any two Impact companies apples-to-apples. But at what cost? The metrics that have risen to the top of the Impact space are, at best, wildly misleading and incomplete lenses through which to view any company. Worse: they perpetuate the false notion that metrics are a reasonable way to evaluate impact in the first place. They’ve become to Impact what the Overhead Myth is to philanthropy, distorting the very market they are meant to organize. And therein lies the crux of the problem: Impact Investing shouldn’t be reduced to simple metrics at all; it should be exalted to philosophy.
In its great rush to define itself, Impact Investing risks losing itself. It’s an inner-city teenager filling out her application to Harvard and then, on her personal statement essay, forsaking her differentiated upbringing to write about how well she will assimilate to the University’s elite, moneyed culture. If we wish to deploy Impact Investing intelligently as a new source of capital, to see it succeed where other sectors have failed - and we should - then we need to reward it for what makes it unique, to be honest about what it is and what it does, and to remove from it the expectation that it will bring nothing but rainbows and sunshine.
Impact is often romanticized as a sustainable farm in Guatemala funded to combat the corporate greed of a villainous conglomerate. Always David; never Goliath. In reality, the lines are blurrier. Solutions only work if they scale, and once they scale, the mark they make on the world is exponentially more complicated, closer to chaos theory than GAAP accounting. No business ever exists in a vacuum, and pretending it does is an enormous disservice.
Consider the case of Twitter: No other invention has so thoroughly and rapidly democratized access to information; the printing press might be second. Malcolm Gladwell wrote of the platform that “the traditional relationship between political authority and popular will has been upended, making it easier for the powerless to collaborate, coordinate, and give voice to their concerns.” Former US national-security adviser Mark Pfeifle suggested that, for its impact on the 2009 Iranian Presidential Elections, Twitter should be nominated for the Nobel Peace Prize. Mother Teresa, Martin Luther King Jr., the Dalai Lama, and Twitter. At the time Pfeifle made that comment, Twitter had raised $55MM in total; for scale, the US State Department spends roughly $50 billion annually promoting peace and democracy.
Is Twitter the single greatest Impact Investment of all time? The obvious counter argument is that it also serves as a platform for rampant Cyber-bullying, which recent research published by Scientific American has linked to depression and suicide, especially in teens, in addition to other negative emotional and psychological effects. Twitter, of course, also played an outsize role in the dissemination of fake news in our 2016 Presidential Election and otherwise contributed to the erosion of civil discourse – and civility – in America.
Social issues are a constant trolley problem; if a job at a traditional Wall Street firm requires an MBA, Impact Investing might also demand a Doctorate in Ethics. For the former, the calculation is generally just what the financial return was on invested capital. The reason Impact Investing is more complicated, however, is not because its outputs are harder to count, but because they are harder to weigh. We can both accurately and precisely quantify Twitter’s effect on instances of teenage depression and suicide as well as the number of corrupt governments it has helped topple. What every investor must answer for themselves is how many of the latter sufficiently justify the former. The solution isn’t to pretend these questions are easy; it is to recognize that they aren’t.
Consider another example. The two following facts about E-Z Pass, a government-sponsored association of toll agencies, are both true:
- E-Z Pass reduces birth defects by 10% within two miles of a toll plaza by decreasing CO emissions from idling cars*.
- E-Z Pass has eviscerated tens of thousands of jobs previously held by toll takers.
Does E-Z Pass create net positive social return — is it impactful? Again, that depends on your worldview. The root question is really how many jobs you would trade for a 10% decrease in birth defects? Governments, unlike traditional investors, don’t have the luxury of ignoring these tough questions. Political realities often demand not only their attention to them but also transparency in their approach. Most developed governments even go as far as to publish some form of a “Value of a Statistical Life” (VSL) calculation to show their work on difficult decisions**.
So is the public sector the perfect complement, the yin to Wall Street’s yang, the safety net that solves the problems Wall Street won’t touch? Not exactly.
Government, too, is far from perfect, but its failings often don’t result from any inherent ineptitude; rather, they stem from fear of the politicization of its mistakes (think: President Obama’s investment in Solyndra). Partisanship — on both sides of the aisle — increases the risk of investment without equally adjusting the reward of potential returns. A top-of-the-segment criticism on either Fox News or MSNBC is enough to paralyze any civil servant, to bastardize the process of smart policymaking. Wall Street is incentivized to chase upside unrelentingly and without sufficient punishment for negative consequences; government is left with our most gnarly and intersectional challenges yet stripped of its ability to attack them nimbly, holistically or with due nuance. This is society’s most dangerous asymmetry, the imbalance between the recklessness with which damage is caused and the painstaking deliberation with which it is remedied, cleaving a path not for solutions to take hold but for problems to fester.
Many of the defining social issues of our generation — income inequality, climate change, gun control — are not anomalous accidents of history; they are born directly of this structural misalignment. To thread this needle is the future of Impact Investing: A nobler Wall Street meets a more-effective Washington, marrying the political freedom of the former with the most righteous aims of the latter. They say Cash is King; Impact Investing can be The Benevolent Dictator. It is our best weapon with which to fight our most intractable issues — those still persisting after all other sectors have tried, the bacteria that have developed the strongest resistance to the antibiotics.
Famed economist Amos Tversky once said, “It is sometimes easier to make the world a better place than to prove you have made the world a better place.” The best Impact Investments of the next decade will likely have the most convoluted stories. That’s OK. As an investor class, if we truly care about solving complex problems, we shouldn’t be asking Impact companies to simplify their narratives; we should be demanding of ourselves the sophistication requisite to understand them in full.
*A 2011 study funded by the MacArthur Foundation found that the introduction of E-Z Pass in New Jersey and Pennsylvania led to a 10% decrease in low birthweight and prematurity (gestation less than 38 weeks) in the two kilometers surrounding a toll plaza. Carbon emissions come mostly from cars, and cars produce much of that pollution when idling. “E-ZPass reduced CO by about 40 percent in the vicinity of the toll plazas and also reduced many other pollutants found in vehicle exhaust.”
**The United States Department of Transportation’s (DOT) calculated the VSL at $9.6MM in 2016.