Why Impact Investing Does Not Mean Sacrificing Returns by Knowledge@Wharton
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The Angella and David Nazarian Social Innovators in Residence program at Wharton hosts leaders who leverage business-based solutions to solve economic and social challenges in communities around the globe. Liesel Pritzker Simmons, the 2015 Nazarian Social Innovator in Residence, is the co-founder and principal of Blue Haven Initiative, an impact investing single-family office seeking to invest in solutions to social and environmental challenges. Stephanie Kim, associate director of community strategy at the Wharton Social Impact Initiative (WSII), spoke with Pritzker Simmons about how to invest in projects and products with an eye toward affecting change in the world.
An edited transcript of the conversation appears below:
Stephanie Kim: You supported WSII’s impact investing research this year. Our report, “Great Expectations: Mission Preservation and Financial Performance in Impact Investing,” aimed to debunk the expectation that impact investors must always sacrifice financial returns when seeking social returns. We found no evidence that supports the trade-off. What was your reaction when you heard these results?
Liesel Pritzker Simmons: Quite frankly, I was not surprised. I was very pleased to see the weight and rigor that Wharton can bring to the research. But anecdotally, from my own experience as an investor and in working with other investors, we have not actually seen that trade off that I keep hearing about from more traditional investors. I was very pleased that my sort of anecdotal experience now had some academic rigor behind it because I think one thing that’s been a real struggle in the impact investing space is traditional investors sort of believe this myth that there needs to be a trade-off. Sometimes there can be, but if you’re seeking commercial returns or market rate returns, chances are you can achieve those and also achieve your impact goals as well.
Kim: With so many options for interventions and impact areas, how did you decide on your company’s investment strategy and portfolio?
Pritzker Simmons: Blue Haven Initiative is the single-family office of me and my husband. Several years ago, we had a fairly traditionally invested portfolio, so it was diversified across asset classes according to a risk-return profile that made sense for our family and our capital preservation and growth goals.
But it really wasn’t paying attention to what the social and environmental impact of those investments were. We decided that that was something we cared a lot about. We care about what our investments are doing in the world. I don’t think that investments are just neutral. I think that where you put your money and how you invest it makes a difference. It has an impact.
We really wanted to make sure that impact was a positive one on all three fronts: social, environmental and financial. Starting with that premise, the real challenge for us and for our financial advisors is, can we do that with all of the assets in our portfolio? Not just a sliver, but with everything? Can we look across asset classes and find best-in-class managers and strategies that meet our hurdles socially, financially and environmentally? We started with that approach and then populated the asset classes once we found managers and strategies that we felt proud of.
“I don’t think that investments are just neutral. I think that where you put your money and how you invest it makes a difference. It has an impact.”
Kim: What about the target areas? There’s poverty, hunger, health — there’s a million different areas. How do you pick what to invest in?
Pritzker Simmons: Different investors will give you all different kinds of answers, and they’re all right. It all depends on what your approach is. We decided to start with the financial asset classes and be impact-agnostic as to what the sector was that the manager was working in because I think it’s very difficult with the size of portfolio that we were dealing with to say, “We’re going to solve water” [problems] or “We’re going to fix [issues relating to] women,” or to even set a certain geographic area. It would be very limited to try to find best-in-class managers.
So you end up with green real estate that has a steady yield. We’ve got private equity funds that obviously have a longer lockup but are focused on financial inclusion. There are some areas that are focused on health. There’s a lot of project finance into renewable energy projects. I would say the environment is probably one theme that we have a pretty heavy exposure to across the entire portfolio.
With the majority of the portfolio, we really want the managers to pick the area and strategy from the impact standpoint, so exposure to impact really was more opportunistic than strategic. However, in our direct investment portfolio where we look at early- and growth-stage companies and make debt and equity investments directly into them, we have a very focused strategy around financial inclusion and renewable energy in East Africa particularly.
Kim: What does it mean to have a very focused strategy? Is it finding a lot of different companies that are doing similar things? Are you taking a more systems, holistic approach?
Pritzker Simmons: With our direct investment strategy, we started with a premise that we were very interested in East Africa as a geography. It’s growing pretty quickly, and there’s a very high penetration of mobile money there, which allows a lot of really interesting technology platforms to be built off of that high penetration of not just mobile money, but mobile phones in general. The fact that you’ve got a pretty large consumer base that is extremely comfortable transacting over mobile money, the highest penetration in the world, you get lots of interesting companies that are popping up and using that as a base for different kinds of financial services platforms.
I have a background working in microfinance — really good financial services for consumers that are underserved with good financial products — and I have seen firsthand what a difference that makes. Being able to have insurance products to cover a funeral of a loved one can keep a family above the poverty line in a pretty significant way. Being able to access savings accounts, being able to access loans that are appropriate for your business and appropriate for your own cash flow needs make a very, very big difference in somebody’s life.
I’m inclined to look at financial services and then the technology platforms that can help to disintermediate and lower costs for those consumers. That’s an area I have deep passion around and as a financial investor, it makes a lot of sense. I’m not coming into this with a deep background in how to develop wind turbines, but financial services and products I get. I understand those business models, so as an investor it makes sense for me to play there. And I think it’s an area of deep impact.
“Did you do what you said you were going to do? For me as an investor, did my money participate in what you said it would participate in? Hopefully, the answer is yes.”
Kim: So you have the asset managers, you have the different strategies that they’re choosing based on what they see makes sense for the asset class that they’re managing, you have a strong focus on certain interventions that you see working and that make sense based on your interest and competencies. Rolling it all back again to this idea of financial return and desire to impact, how do you make that happen?
Pritzker Simmons: We do our very best to measure and to monitor, and a lot of it is based on intentions. [Let’s say] we’re invested in a certain fund manager who says, “Well, we would like to have this mix of muni bonds that are working in underserved communities or this mix of corporate bonds that are lending to corporations that have very high ESG (environmental, social and governance) standards.”
Then, did they meet those targets on the social and environmental side? And what’s happening with the benchmarks that they’re tracking against? Did you do what you said you were going to do? For me as an investor, did my money participate in what you said it would participate in? Hopefully, the answer is yes.
We look for companies where the impact is embedded in their business model. The more they scale, the more they grow, the deeper our impact is. With those companies, we tend to be even less hands on, on the impact side, because really what those companies need are to be operationally streamlined and efficient and grow as quickly and as rapidly as they can. Then, by default, our impact is deeper. We’re there, though, if there are decisions that companies make to pivot away from the impact. We’re there to try to help keep them on track. But so far we haven’t found a lot of that.
Kim: At Wharton, we love seeing those types of companies where the impact is baked into the business model — it’s not a campaign, it’s not something on the side. The slogan that we’ve used many times is that “business for good is good for business.”
Pritzker Simmons: It is. With the “Great Expectations” report, a lot of that was around preservation of the mission on exit for those companies. Did managers and the underlying portfolio companies think that their mission was compromised upon exit? The answer is no, because if they were to pivot away from the impact piece, their core business would probably change, and their consumers wouldn’t want that. You really can have those things in alignment. That’s what I think is so exciting about this space and why it’s growing as quickly as it is.
Kim: At the end of the day, we’re all working towards a similar vision of a world without poverty, without hunger, without preventable disease, etc. Impact investing is a growing vehicle to address that. But we’re still working in a world with a lot of traditional philanthropic models. How do you think that practice of philanthropy will evolve as impact investing continues to grow?
“This generation really wants to see both profit and purpose happening at the same time. Their standards are higher.”
Pritzker Simmons: There are lots of different kinds of tools that people have in their tool belt to try to attack some of these problems, and impact investing is one of them. At Blue Haven, we engage in commercial rate, return-market rate impact investing. There are foundations that are happy to take concessionary returns, and that’s wonderful and needed. Then there’s straight grant money that is not seeking any kind of financial return but hoping to expand the environmental and social return of that capital. I think that all of these tools can play well together.
But what I think is exciting about people looking at business models and financial tools to try to advance some of these social and environmental goals is, it frees up some of that philanthropic capital to do actual grant work. If you look at some of the development aid models over the years, you’ve had philanthropic dollars or development dollars that are being used for something a business would be better to solve. It would be more scalable, it would be more sustainable, and also it would be something that people want. People aren’t going to buy something that they don’t want. You’ve seen a lot of different kinds of weird products and widgets out there in the market that have been developed in some lab in Cambridge, Mass., and shipped over to Uganda, and nobody really wants it or uses it after six months.
If people actually have to buy something, we try to make it as low cost as possible. The market will tell you whether that is useful to them or not. I think that using business in this way helps to save that philanthropic money from being not so strategically dispersed and use it for things that only philanthropic capital can be good for — disaster relief, refugee crises, education, the arts.
Kim: What’s next in the impact investing space? What does it need?
Pritzker Simmons: What I’m really excited about is [we’re] starting to see more and more traditional investment firms and larger banks, instead of doing impact investing out of their CSR (corporate social responsibility) or marketing departments, moving into [offering] products and services. They are starting to devote internal resources to their staffs to try to get them up to speed.
It’s not that cute thing that’s happening over in the corner in philanthropy. It’s starting to move into the more mainstream parts of the bank. I think there’s a big millennial push for it. You’re starting to see more MBAs get incredibly excited about it, and I think the banks know that. If they’re going to recruit the best talent — this generation really wants to see both profit and purpose happening at the same time. Their standards are higher.?Twitter
I get very excited about seeing this going mainstream and, particularly with family offices, not having such a bifurcated approach, not having your investment vehicle over here making money and then you move it over here and you give it away. That seems very inefficient to me. I like having those two sides of the balance sheet start to come closer together, and that I think is really exciting.
