October 9, 2019

Impact Washers Should Fear Real Impact Investors, Not The Other Way Around

SOCAP Post Author

To help you prepare for the conversations that will be taking place at SOCAP19 we asked our media partners to curate a selection of recent stories they have published on today’s most important topics in the impact space. This week’s suggested reading comes from ImpactAlpha. Use code SOCAP19 at subscribe.impactalpha.com to get your first month for $10.The idea of “impact investing” has scaled faster than the practice.
Every realm of business and finance, from private equity to institutional asset owners to corporate performance to retail investing, is getting all dressed up with environmental and social value.
Just this year, hundreds of corporate CEOs have lined up behind “stakeholder” capitalism. Wealthy investors have moved billions in stock market gains into “Opportunity Zone” investments in low-income communities around the U.S. Giant private equity firms have rolled out a steady stream of billion dollar impact funds.
So why are impact’s pioneers so nervous?
Everywhere they look, long-time impact investors see asset managers, private-equity firms, high-net-worth individuals and big banks raising money and making claims to social and environmental benefit, but without committing to deep intentionality, rigorous impact management practices or accountability. “Impact washing” threatens to undermine the credibility of the whole impact proposition, they fret.
Rather than wring their hands, investors that actually practice rigorous impact investing should seize the moment. Now that financial institutions and big-shot investors have put themselves on the hook for impact, demand is spiking for those that can actually deliver it.
As the driver of impact investing shifts from “client demand” to “long-term fundamentals” impact-washing just won’t cut it. Deep, rigorous, accountable impact is becoming a competitive advantage.
Among the new stakeholders, genuine impact is a license to operate. In Opportunity Zones and frontier markets, community engagement is the premier risk mitigator. In the new era of value-creation, tracking impact is how you know you’re satisfying customers. As the twin crisis of climate change and income inequality gain urgency, investors are increasingly reaching for impact solutions. In the portfolios of the future, impact is the key to long-term value.
Going forward, actually delivering impact is the only way to capture that impact alpha. Here are three ways:

Corporate accountability is key to the success of ‘stakeholder capitalism’

The statement from nearly 200 CEOs redefining ‘corporate purpose’ to include customers, workers, communities and suppliers, along with shareholders, catches them up with other business leaders, not to mention impact investors. Put another way, the Business Roundtable is a lagging, not leading, indicator.
Smart CEOs have long known long-term value creation means satisfying multiple stakeholders. Last May, Harvard’s George Serafeim presented evidence to the Roundtable that “firms with strong purpose and strategic clarity about that purpose and firms with strong material ESG performance create more value.”
The pledge from CEOs of Apple, IBM, Johnson & Johnson, JP Morgan and other companies resets default assumptions away from “shareholder primacy,” the dominant corporate ethos of the last few decades. Now they must back it up with real progress for those stakeholders.
Increasing accountability to employees, customers, suppliers and communities shouldn’t mean decreased accountability to shareholders. Especially when some shareholders are the ones who have been arguing on behalf of those other stakeholders.

Investments in ‘people and places’ start to demonstrate impact in Opportunity Zones

ImpactAlpha had no sooner published an article detailing how investments in ‘people and places’ can demonstrate genuine impact in Opportunity Zones, when The New York Times unloaded its 4,000-word critique of the zones as a “windfall for the rich.”
Sure, capital gains tax incentives have spurred developments that generate few benefits for residents of low-income communities. At the same time, impact-led collaborations are showing that deep engagement with communities can boost investment success, by mitigating project risks and accelerating timelines. Opportunity Zone projects that take a collaborative, impact-focused approach can move “farther, faster,” says Economic Innovation Group’s Rachel Reilly. 
“If you can understand the risk in these communities, you can make really good returns,” SoLa Impact’s Martin Muoto told ImpactAlpha. SoLa has nearly hit its $100 million Opportunity Fund target and already has invested $28 million to acquire 17 properties for affordable and workforce housing in South Central, Compton and Watts. Community organizations will provide social services for tenants.
In Erie, Pa., local institutions and developers are betting that Opportunity Zone investments in a downtown culinary arts district will help “shock the market back to life,” as John Persinger of Erie Downtown Development Corp told ImpactAlpha. The Wall Street Journal caught up with the Erie story a month later.

For private equity giants, $1 billion is table stakes for entry into impact investing

As legacy private equity firms move into impact investing, the impact of the rest of their portfolios is getting a closer look as well.
The latest case in point: Blackstone, the $512 billion private equity giant that announced its new impact investing platform in May. That made the firm’s decision not to sign the recent Business Roundtable’s recent CEO commitment to “stakeholders” stand out.
Even more striking: Blackstone’s bid to take private an oil and gas pipeline company it invested in earlier this year and the firm’s part ownership in two Brazilian companies responsible for deforestation in the Amazon rainforest.
Apollo Global Management, which is raising its own $1 billion impact investing fund, is also facing criticism. The firm “has a history of investing in businesses that prey on low and moderate income people,” according to the Private Equity Stakeholder Project.
Other legacy asset managers on impact watch: KKR, which is said to have reached its own $1 billion target for its Global Impact Fund and TPG Growth, which is in the market with a second, $3 billion Rise Fund, revised downward from its initial $3.5 billion target (but still 50% greater than Rise I).
Learn more. “Agents of Impact” at SOCAP get their daily impact investing news from ImpactAlpha. Use code SOCAP19 at subscribe.impactalpha.com to get your first month for $10

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