What Would Impact Investing At Scale Look Like? $20 Trillion for Good
Recently, I interviewed Ben Thornley of InSight and author of a new study on impact investing, which demonstrates that institutional investors, such as pension funds and endowments that invest for social and environmental outcomes are also earning a competitive rate of financial return. Launched a few weeks ago in New York by InSight at Pacific Community Ventures and the Initiative for Responsible Investment at Harvard and funded by The Rockefeller Foundation, the report, Impact at Scale: Policy Innovation for Institutional Investment with Social and Environmental Benefit, reveals numerous government strategies that catalyze private investment for public good, including laws in 20 states that allow or encourage “economically targeted investments” where a public pension system invests in its home state to support local economic growth while also targeting a financial return to the fund.
Ben Thornley is the Director of InSight – the thought leadership practice in high-impact investing at Pacific Community Ventures (PCV). PCV is a preeminent San Francisco-based Community Development Financial Institution and growth equity manager deploying $60 million in three funds with the aim of creating quality jobs in low-income areas of California.
Ben is responsible for PCV’s policy research and non-financial performance evaluation initiatives, working with prominent institutions including the California Public Employees Retirement System (CalPERS), The Rockefeller Foundation, and The California Endowment. InSight assesses the social impact of over $1.2 billion of private equity investments by 40 individual money managers and $17 billion invested by CalPERS in California, across asset classes.
Rahim Kanani: What was the motivation behind publishing Impact at Scale: Policy Innovation for Institutional Investment with Social and Environmental Benefit?
Ben Thornley: The motivation was twofold: first, it was an important next step in our efforts to document how governments can support the growth of impact investing. In an initial report published in January 2011, we worked with the Initiative for Responsible Investment at Harvard to frame the manner in which government can grow the supply of impact investing capital (for example by co-investing alongside private investors), develop demand (for example by providing technical assistance to the recipients of capital), and direct capital to social impact (for example by offering tax credits for affordable housing, clean energy, and other markets of interest). We wanted to hone in on a particularly important group of stakeholders –US institutional asset owners – in order to explore the relationship between the public sector and private investors in more detail.
Second, we wanted to broaden the discussion about impact investing more generally to include the largest players. US pension funds, insurers and endowments control over $20 trillion and could potentially change the game by bringing markets with intentional social and environmental benefit to scale.
Rahim Kanani: In the report, you discuss locating the role of policy in impact investing markets. What role do you propose the government play in this new space?
Ben Thornley: Institutional asset owners face a number of challenges when investing for impact. Fiduciary duty requires that institutions invest capital with the expectation of earning a competitive rate of financial return commensurate with risk. And because institutions deploy large sums of capital, usually through third-party intermediaries, the vehicles they invest in must be scalable and relatively conventional, with the requisite track record of performance. Against this backdrop, impact investing looks idiosyncratic on a number of levels – which is precisely why government support is needed. Specifically, our report documents three policy strategies for engaging institutional asset owners in impact investing. Where impact investing markets are small and unconventional, but of interest to institutions, government can use an “enabling” strategy to help make idiosyncratic opportunities match conventional markets more closely.
For example, this might include using loan guarantees. Where, because of limited capacity, institutions simply do not have the bandwidth to consider making investments with secondary social or environmental benefits (and most do not; the practice tends to be more arduous than when making traditional investments), government can use an “integrative” strategy to build social impacts into mainstream markets. This might include by mandating social performance through environmental standards in real estate, or by using tax credits to favor subsectors like affordable housing. Finally, where markets are nascent in sectors like health care or education, the government can use a “developmental” strategy to provide additional infrastructure through R&D and technical assistance.
Rahim Kanani: Towards that end, what are some examples of particular policies around the world that encourage or align with the world of impact investing?
Ben Thornley: There are literally hundreds to choose from, particularly in the United States. This includes everything from the Community Reinvestment Act, Low Income Housing Tax Credits, New Markets Tax Credits, and Community Development Financial Institutions (CDFI) Fund program that support primarily real estate investments in low-income communities, to the over 20 state laws mandating or encouraging economically targeted investing by public pension funds. In Hawaii, for example, the Hawaii Employer’s Retirement System is required to consider the impact of all prospective venture capital investments on the state economy and local job creation, among other factors.
India has been catapulted to the forefront of developments in corporate social responsibility, with the National Voluntary Guidelines for the Social, Environmental and Economic Responsibilities of Business – a very detailed set of non-financial performance metrics that, while voluntary, will enable investors to better screen for impact. And in South Africa, the Pension Funds Act was recently amended to encourage institutional asset owners to “give appropriate consideration to any factor which may materially affect the sustainable long-term performance of the fund’s assets, including factors of an environmental, social and governance (ESG) character”. Policymakers are also considering extending the amendment to allow institutional asset owners to deploy up to 5% of their portfolios to targeted investments, defined as investments in areas where gaps or backlogs in economic development and job creation have not been adequately addressed by financial markets.
Rahim Kanani: What are some other key findings of the report?
Ben Thornley: We were surprised to discover that, even within the constraints of fiduciary duty and the strictures of conventional portfolio management, US institutional asset owners have been very creative in finding ways to support regional economies and deliver the other secondary social or environmental impacts of priority to beneficiaries.
In other words, our report takes a set of subterranean activities more commonly ascribed to “responsible investing”, “economically targeted investing”, “mission-related investing”, or “ESG integration” (rather than “impact investing”, although the goal of creating secondary social and environmental impacts remains the same), and simply makes them explicit.
For example, the State of Wisconsin Investment Board has provided over $350 million of senior and subordinated debt financing to companies headquartered or operating in the state since the 1960s. The Florida Growth Fund was created by the Florida State Board of Administration to invest $500 million in local businesses. CalPERS, the California Public Employees Retirement System, invests over $130 million in the Alternative Investment Management (AIM) Environmental Technology Program, targeting environmental or clean technologies that are more efficient and less polluting than existing or legacy products, services, or technologies. And operating from its headquarters in Illinois, the General Board of Pension and Health Benefits of the United Methodist Church has invested over $775 million since 1990 in affordable housing and community development, primarily through CDFIs.
Impact investing by institutional asset owners is not some theoretical practice, but a reality that can be supported and scaled, including by policymakers.
Rahim Kanani: How would you like this report to be read and understood?
Ben Thornley: Public policy is ubiquitous in financial markets, not least when it comes to impact investing, whether we like it or not. This report is further evidence that government plays a key role as underwriter, co-investor, regulator, procurer of goods and services, or provider of subsidies and technical assistance. Presuming that a holistic discussion about impact investing should therefore incorporate elements of policy, the need for translation and intermediation becomes more urgent, which is where our report fits in. Governments need help understanding how private investors see the world and the types of policies likely to be effective in catalyzing private capital for public good. Investors need help understanding how their activities intersect with policy (sometimes unwillingly) and the proven options that governments have to be supportive. We would like the report to be understood as a tool for facilitating cross-sector collaboration.
Rahim Kanani is a writer, advocate, strategist and entrepreneur for global social change. His articles, opinions, and interviews with global leaders can be found at www.rahimkanani.com. Follow him on Twitter @rahimkanani and on Facebook. Have an idea for a great interview? Email email@example.com.