Impact investing is coming of age. Earlier in this decade, this new style of investing raised the question of whether socially conscious investors could really do well while doing good. Today, while we are still early in the journey, we think the answer to the question is clearly yes.
This view is based on a clear source of value that impact investors are able to tap into that is not available to other investors. This value is based on an emotional alignment among investors, management, customers and other external stakeholders around a corporate purpose that recognizes all of their interests.
Impact investors help foster this sense of mission and create firmwide accountability around broader social goals by tracking results and rewarding achievement. Clarifying the social purpose of an organization energizes all key constituents — allowing a company to reach for new heights, both commercial and social.
The impact investing market has attracted a wide range of players, from venture philanthropists who explicitly trade return for social impact, to public equity funds that incorporate environmental, social and governance criteria into their asset selection. Investment funds including Bain Capital Double Impact and TPG Rise, as well as venture funds such as Bridges Fund Management, SJF Ventures, DBL Partners, use the tools of traditional private equity and seek market, or better, returns from their investments.
Private equity impact investors do more than just pick impactful companies for their portfolios and exclude others — these investors usually aim to add to the social output of the companies in which they invest. Importantly, socially oriented missions can be adopted by a variety of different companies across industries, not just those dyed-in-the-wool firms explicitly created to solve social problems. Impact investors maximize their scope of influence when they align with mainstream companies.
While all of investment strategies take macro perspectives into account, impact investing benefits from the convergence of three accelerating megatrends:
1. Millennial consumers care more about where their products come from. It's a long way from the days when Ben & Jerry's seemed like the only socially conscious company on the planet.
2. Many companies have started to double down on the "planet and people" ethos. Consumer products giant Unilever has realized economic and reputation benefits from its efforts to foster the global growth of many socially conscious brands, and recently purchased Sundial Brands, a sustainable hair and skin care company.
3. Encouraged or led by second or third generations, wealthy families and their investment offices are starting to sharpen the focus on how their investments align with their values. Other, more institutional, investors are following their lead.
Economic incentives to achieve alignment among these constituents are important, as they are for all private equity. But for impact investors, alignment in achieving long-term social objectives has proven particularly crucial — and creates a new kind of corporate discipline.
Of course, there are both costs and benefits associated with driving impact, and these efforts take time to show measurable results. As with many investment strategies, whether the cost-benefit pays off in the end likely will have more to do with how well they are executed than whether the strategy is right or wrong. But the tools used to energize stakeholders are working and give us reason for optimism.
Recent examples include Impact Fitness, a franchisee of Planet Fitness Inc. in the Upper Midwest that encourages no-commitment sign-ups from first-time gym members in underserved and financially disadvantaged communities. It seeks to use social media and other tools to drive and maintain usage, and to get health insurance carriers to provide financial support for memberships. Or the high school equivalence business Penn Foster Inc., that is moving into workforce skills training. Another example is investments in disruptive restaurant brands that serve customers healthier and more sustainable food, and along the way educate them about ways to improve their diets.
"It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest," Adam Smith wrote in "The Wealth of Nations." Of course, he was arguing that self-interest can lead to unintended yet positive consequences, even though he was no big fan of do-gooders.
Properly executed, impact investing has the potential to produce this same win-win dynamic. Indeed, impact investing is no longer solely for savvy investors who want to change society for the better. It's for everyone.