by Daniel Madhavan
The impact investing community continues to grow, momentum continues to build and the conversation continues to evolve. One of the most enjoyable features of this growing community is the diversity of perspectives around the table.
It all makes for interesting conversation but also a complex one. That complexity is often justified as we all navigate an emerging field. But there are times I worry we risk becoming distracted with issues that will ultimately resolve themselves. I thought I would take the opportunity to share thoughts on two such issues.
- It’s all good… all of it
There is a lot of debate around what is an impact investment, deal or product.
Terms like ‘impact washing’ and distinctions between ‘lite impact’ or ‘deep impact’ are beginning to be drawn. My favourite is the emerging distinction between little ‘I’ impact, where we are applying impact measures to old money and old models (eg measuring the impact of a large established company listed on the stock market) versus big ‘I’ Impact which involves new money into the system using new models to drive social or environmental impact (eg new capital provided to a social enterprise that is scaling up a solution for youth unemployment).
In my view it’s all good. It all contributes to growing the market for impact investing, shifting investor mindsets, providing capital to support change we want and ultimately helping more beneficiaries.
If little ‘i’ impact investment involves really large fund managers starting to screen large listed corporations on a range of impact metrics and using that as a decision making tool for billions of dollars… I’m cool with that.
Does little ‘i’ engage me in the same way a big ‘I’ Impact investment in a social enterprise providing employment training and support to disadvantaged youth in my local area does? Well, no. Frankly the little ‘i’ is far more boring and the impact feels far more removed and nebulous to measure. But let’s be clear, the little ‘i’ investment case I just described is far better than what we have had to date. Historically there were few choices regarding which companies received capital based on their values, impact on society or the environment. And investments were made in companies based purely on their financial results regardless of impact.
Today we have complex arguments around why some impact is better or worse, why one investment is impact and one is not. I’m not against the debate (choice is a great problem to have!), I just don’t think we should let the debate paralyse us from making progress. Going back to the unique diversity this community represents I can’t help feeling there are two paths we can go down and that getting caught up in definitions and distinctions pushes us towards the path with a far less powerful outcome.
With such a diverse group we run the risk of taking the path that ties us together under the idea of impact investing but with a weak tie that keeps us separated into our many tribes eg institutions, non-profits, private individuals, trusts and foundations. One idea but many tribes.
The far more powerful outcome and the path I hope we traverse is the one where we are tied together as one tribe, one community of impact investors but we respect that there is a diversity of ideas. One tribe with many ideas. That sounds far more interesting to me.
- If you need track record we are a long way from Cup Week
The Spring racing carnival and the Melbourne Cup are behind us. The average Aussie, who for one day or week of the year does their best to pick a winner by looking to a horse’s record, has now hung up their hat for another year.
For those unaware that horse racing exists outside of the Spring Carnival, it’s not fancy hats and exclusive marquees all year round. For most of the year the days a filled with many an average nag trying to find the line first on some obscure country race track. And there are also many races filled with horses that are yet to win a race, these races are called Maiden races. It doesn’t mean that the horses are no good, in many cases the horses have simply never raced before, which is exciting because you might just be watching the next Cup winner race for the very first time. To pick a winner in these races is a little more difficult because the horses don’t have a record to look at. So punters often need a larger appetite for risk and to look at other indicators like the trainer’s reputation or the jockey’s record.
So what could this possibly have to do with impact investing? Well, right now many are concerned about the ‘lack of impact investment opportunities’ relative to the investment dollars ready to be deployed. My response to this draws on our Cup Carnival parallel. We are in a market that is growing rapidly but is still in its infancy. That doesn’t mean there are a lack of opportunities but it probably does mean that many of the deals, funds, businesses and assets that represent those opportunities are not going to have the track record one would expect from more traditional investments. That doesn’t make them ‘no good’, it simply means that they haven’t been operating for long enough to have a track record.
So it may require a different approach and a different risk appetite….at least for now. Applying the same criteria and the same risk parameters to a market, products and investment types without the track record can be difficult and can limit options.
Alternatively investors can always wait until the market matures and more funds, deals, managers etc have a longer track record. And it will happen. Unfortunately the world doesn’t work in such a way that the supply of investments exactly matches the demand for investments everywhere and at all times. Sometimes there will be more money than deals and sometime there will be more deals than money.
For some, waiting until the next Cup Week comes will work best. But for those that are serious about racing it isn’t just about the established champions, the fancy hats or exclusive marquees. It’s about finding the first starters, backing them when they are maidens and following them on to becoming the next Cup winners.
This blog post by Daniel Madhavan is adapted from a Generosity Magazine story