The ABCs Of Impact Investing
September 28, 2015
by John Appleby
Odey's Brook Absolute Return Fund was up 10.25% for the third quarter, smashing the MSCI World's total return of 2.47% in sterling. In his third-quarter letter to investors, which was reviewed by ValueWalk, James Hanbury said the quarter's macro environment was not ideal for Brook Asset Management. Despite that, they saw positive contributions and alpha Read More
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Impact investing is a small but growing segment of the financial landscape. It is coming to the fore as individual investors seek to “do good while doing good.” Groups from wealthy entrepreneurs to the G8, the UN and the Pope are talking about the subject. Here’s what advisors need to know if they want to serve clients who strive for “impact” with their investing.
First, let’s look at how Google has bought into the impact-investing trend.
In a well-publicized, but somewhat puzzling move, Google, one of most recognized brands on the planet, recently changed its name to Alphabet. This runs counter to all business school theory that preaches the importance of building a dominant global name. Thus many MBA types were left aghast at the news that overnight Google was now recast as a subsidiary to the Alphabet holding company.
Yet when you get beyond the noise, a story begins to emerge of a pair of founders – Larry Page and Sergey Brin – who are not content to settle for incremental brick-by-brick approach to brand building. Instead, they want to invest in high risk, high impact “moon shots.” “From the start we’ve always strived to do more, and do important and meaningful things with the resources we have,” Larry Page wrote in a press release in August. These high-stakes ventures – driverless cars, cancer drugs and virtual reality to name a few – have now been placed in subsidiary businesses under the Alphabet umbrella.
There is great business logic behind the move. Each business is now accountable to the holding company and any losses do not impact the still highly profitable Google franchise. The name, Alphabet, also makes sense. A rate of return above normal – Alpha – and a gamble – bet.
The new-look Google is striving to make an impact on the world.
In many ways this decision adds to the mounting evidence that government aid and philanthropic activities are not able to have the desired impact and the recognition that perhaps private enterprise is the best vehicle to solve some of the world’s most intractable social problems. Indeed, Warren Buffett presaged this trend when he famously left his wealth to the Gates Foundation.
But, if private enterprise is the way forward, how do individuals who lack the financial muscle of these business icons make an impact on society? Is it possible to drive meaningful change with much smaller wealth?
Welcome to the world of impact investing
We may look back at the financial upheavals of the first decade of the 21st century as a significant turning point in human history. Since those dark days, there has been a growing consensus around a belief that some of the world’s problems require new approaches. Perhaps, even, a tacit acknowledgement that some problems cannot be left for others to solve. As a result, a growing number of wealthy individuals are becoming attracted to a sector of the market called impact investing.
Impact investing can trace its origins to before the financial crisis, but it has only been since these events that this area has taken on greater prominence. A simple definition of its raison d’etre is “making a return while doing good.” In other words, investors seek opportunities where they can deploy capital to make an above-market return while also benefiting society. The socially conscious investor who seeks to make a rate of return above the market but does so by avoiding investments in companies viewed as detrimental to society, for example tobacco and alcohol, differs from an impact investor who seeks to make a difference by investing in businesses striving to improve human wellbeing such as through education and healthcare.