Impact investing needs a common language

Brian Trelstad

By

03/11/2017

OPINION | The field of sustainable and impact investing has shown tremendous growth over the last few years. But there are still too many asset owners sitting on the sidelines, interested in making an impact but not yet investing for it.

To paraphrase U2’s Bono – a recent high-profile convert to the cause – it seems that many “still haven’t found what they’re looking for”.

So why does interest continue to outstrip activity? One reason is a dearth of suitably scaled investment products. But there’s another problem: We still lack a common convention for measuring the impact of impact investing.

To address this problem adequately, we need to examine the larger process of impact management.

In standard financial management, an investor’s goals are derived in part from their return expectations, risk appetite, time horizon and liquidity needs.

Similarly, impact management is the process by which asset owners understand and articulate their impact goals – where they want to invest, who they want to reach, what problems they want to solve, what risks they want to take – and then translate these into specific investment decisions.

A barrier to entry

An example from Bridges’ United States portfolio helps to illustrate. Our first investment in the US, Springboard Education, offers high-quality after-school enrichment programs in more than 88 schools across 13 states, serving nearly 5000 children and their families.

After-school activities are a real challenge for school administrators. Good children do bad things when left to their own devices, and the education achievement gap widens when higher-income children have greater access to educational enrichment programs after school and during the summer.

For working families, a program such as Springboard can be a godsend. One parent in the program is a single mother, recently arrived from the Dominican Republic, who works long hours at a local restaurant. She can relax knowing that her son is in good hands after school with the Springboard program at DC Bilingual, instead of worrying about where he is and whom he’s hanging out with.

So, when we think about Springboard’s impact, we ask questions like: how many students does it serve? What is their socioeconomic background? Do they perform better in school as a result? And are we closing the achievement gap?

The answers to these questions travel from the students and their families, to the superintendent and their school, through the team at Springboard, to our own team at Bridges, to the investors in our fund. Our investors then evaluate this impact data by comparing it with their original expectations of an investment in Bridges, and in the context of every other impact investment in their portfolio.

Different investors think about impact in different ways. In this case, some like that we are working in education. Some like that we are serving the needs of low-income students. And some care about the jobs we create. As a result, finding a standard way to talk about impact investments is an ongoing challenge. And this lack of clarity acts as a barrier to entry.

The capital markets work, in part, because investment decisions are guided by a shared understanding of risk and return. If an investor meets with a financial adviser and asks how to invest $10,000, whether it is at National Australia Bank or Australian Ethical, the adviser will ask the same kinds of questions about the investor’s risk tolerance, time horizon, liquidity needs and existing portfolio.

However, if that same investor asks their adviser how to invest for impact, they’re more likely to get a blank stare, or an admonition that it’s not possible to invest for impact. At best, they might get a broad range of suggested alternatives, from screened equity funds to micro-finance to wind farms.

Towards a better way

Within the impact investing field, there’s a growing consensus that there must be a better way. That’s why more than 700 asset managers, foundations, policymakers and entrepreneurs – including BlackRock, UBS, PGGM, Ford Foundation and Omidyar Network – have come together to launch the Impact Management Project, facilitated by our advisory service, Bridges Impact+. We are helping develop a common convention for impact management that will enable investors to articulate clearly and share their expectations around the outcomes they can expect from all of their investments, not just those in the impact field.

If we get this right, it will help standardise impact reporting. It should also allow us to better understand the relationship between impact performance and financial returns. Ultimately, it can help us convert all those asset owners on the sidelines from interested spectators to active players.

Brian Trelstad is the founding partner of Bridges Fund Management in the US. He will visit Australia in November as a guest of the Responsible Investment Association Australasia’s RI Australia 2017 conference and the Impact Investment Summit Asia Pacific.