As impact investing becomes more mainstream, some critics have argued that investors are driving the social value out as they search for financial value, according to Katherine Pease, principal at KP Advisors. Pease moderated a seminar on impact investing on Thursday at The Alliance Center in Denver.
Erika Karp, founder and CEO of Cornerstone Capital, said the most useful tool bringing together values and returns was governance. To get “the governance right, you must look at the big environmental and social imperatives,” she said.
Scalable impact investing requires innovative business models, Karp said. Not only is “systematically going down avenues of inquiry around environmental, social and governance factors” not a breach of an advisor’s fiduciary duty to investors, she said, but not doing so is. Strategists and analysts who don’t “systematically look at these factors should be fired,” she said. “The next iteration of finance and investing and capitalism” will consider these factors, because “all investing has impact if we know what it is and if we know how to systematically look at it and if we know how to make it intentional and if we know how to measure it,” she said.
Capitalism is the best engine for driving economic prosperity, she said, but right now the engine is stalled. “The monetary authorities globally are beyond capability of doing anything at this point. There’s something messed up about negative interest rates.”
There’s a deficit of “leadership, creativity, innovation and entrepreneurship” that if corrected, can move impact investors closer to their ultimate goals. However, “we need to find the business models that work,” Karp said, “and this takes time.”
Technology will be a key driver in that effort.
“Say Intuit comes out with an app that is explicitly designed to engage those who are off the tax rolls – we’re really talking about the unbanked,” she said. “Intuit can have an app where they can scan a paycheck and start thinking about getting them on the tax rolls so this new tax filer can get a tax credit, a refund, that they didn’t even know was coming. We know that refund goes right back into the economy because they don’t have any discretionary dollars, so they’re going to spend it.”
Engaging consumers that way “is economically constructive for a for-profit company,” she added.
The industry has come a long way from 70 years ago when public firms didn’t even have to disclose their revenues, Karp said. Investors now have more access to information about the way firms are run and can make decisions about value, and they have to decide how deep they want to go in “pure impact or how mainstream they want to go in transforming the corporate sector.” She added that “anything in between is good; progress is good.”
Karp said that the structures that currently exist are undermining long-term value creation. That boards of directors are beholden to shareholders first is a myth, Karp said. Their first fiduciary duty is to the corporation, she said. “The long-term health of the corporation comes first, and if you take care of your stakeholders, your employees, your communities, your shareholders will be taken care of.”
Enhanced analytics are necessary to “sort out the dialogues between about values and value,” she said.
The Forum for Sustainable and Responsible Investment’s (US SIF) 2014 report on the size of the impact investing market found that the vast majority of the $6.7 trillion invested in that sector are in publicly held companies. Globally, there’s between $60 billion and $100 billion in “deep impact” investments, Fran Seegull, chief investment officer and managing director at ImpactAssets, said, or “private companies whose sole purpose is to create the social and environmental impact that’s at the nucleus of their business model.”