Is Impact Investing Winning the Battle but Losing the War?
“Impact Investing inches from niche to mainstream”, reads the title of an upbeat Economist article to mark the start of 2017. The Economist joins a long list of publications and institutions announcing that impact investing has arrived. And, of course, if impact investing is going mainstream it’s because there are more and more proof points showing that you can ‘do well by doing good’. The water’s fine and anyone can join in without fear of giving up financial returns.
There are plenty of good reasons why investing in sustainable trends can lead to strong financial performance. To name just a few: consumers are increasingly seeking more sustainable products, talented engineers want to work for purpose-driven companies and the costs of renewable energy are plummeting. These are some of most significant macro trends of our time, and capitalizing on them is pretty much what any smart investor is supposed to do.
These investments are becoming the obvious thing to do, not just for impact investors but also for incumbent industry leaders. Leading CPG’s are ploughing money into start-ups offering healthier alternatives, major oil companies are investing in solar developers, major banks are investing in fintech startups reaching lower-income communities. Of course they are — it’s their fiduciary duty to try and capitalize on some of the biggest market trends occurring in their industries.
But before we declare the victory of double-bottom line investing, let’s pause and reflect on where we are in 2017. If we needed a reminder that the global economy isn’t necessarily getting fixed thanks to the growth of organic food or even clean power, Trump and Brexit may have been the wake up calls we needed. Unfortunately, capitalizing on these market opportunities has very little to do with addressing the core failures of our economic system. These trends, positive as they may be, rarely reduce the opportunity, wealth or health gaps that separate the ‘winners’ and ‘losers’ in the global economy. In fact, if we’re brutally honest with ourselves, many of them may (unintentionally) be contributing to the wealth and opportunity divide. Super healthy food brands are likely helping more affluent and health-conscious consumers pull further away from low-income communities where fast food is still the norm. Solar power offers significant savings for qualified homeowners, while renters are for the most part locked out of the market. Automation in sectors like agriculture is reducing resource intensity, but also displacing many jobs.
We’re all for the creation of more sustainable consumer products, and we’re certainly all for the creation of a vibrant clean energy sector. But our current global crisis demands that we go beyond these goals, and ask ourselves whether our investments are helping re-define how wealth and risk are being allocated in our economy. To pick one example — would it be great if the “next McDonald’s’’ served healthier fast food? Sure! But arguably even more important is to redefine how workers are treated and paid, how executive compensation works, how wealth is created up the supply chain and who benefits when the company does well.
In our work at Pi, we often use a ‘good-better-best’ framework to assess our investments (I know, not very scientific). In general, if we invest in companies that are merely capitalizing on consumer or technology trends, but fail to address systemic market failures, we’re probably in the ‘good’ category. You could say we’re staying at the surface level, but not getting to the deeper underlying flaws in our economy. We do support these investments, particularly because we don’t want to sit on our hands and hold off until we find more transformative ones. But to quote my partner at Pi, Morgan Simon — while we often hear that we must not ‘let the best be the enemy of the good’, we need to balance that and make sure that in impact investing the good doesn’t become the enemy of the best.
In our portfolio, we’re constantly striving to move beyond the ‘good’ and invest in companies like Uncommon Cocoa, which is completely redefining how value is distributed in the cocoa supply chain, Lendstreet, which gives distressed borrowers a way to a healthier financial future (rather than just offering cheaper debt), or Namaste Solar, a worker-owned solar installer which has won dozens of awards for how it treats its worker-owners.
As anyone doing this work knows, there are no easy answers when it comes to defining impact ‘success’. But as a starting point, we should at the very least be asking the question for every investment we make — is this a strategy that helps re-define who wins or loses in our economy?
We should certainly celebrate every ‘battle’ won along the way, as more investors find they can integrate social/environmental considerations into their portfolios and make money. But we should not lose sight of the broader ‘war’ — to create a financial and economic system that leads to more equitable outcomes.
