The Case for Impact Investing at Scale

The past year has been pivotal in further highlighting the value proposition at the core of impact investing: Purpose-driven investing strategies aimed at addressing social and environmental problems are part of the present and our futures.

When it first emerged a little over a decade ago, the idea of impact investing had its doubters. Was it really feasible to pursue investment opportunities with the explicit intention of generating both positive and measurable social or environmental impacts alongside competitive financial returns?

If it was going to work, the strategy seemed most likely to succeed with venture or growth-equity in technology-oriented businesses and in emerging or developing markets. The additional question of whether such a philosophical approach could ever be extended into more mature companies or other parts of the investment ecosystem loomed in the background.

It turns out that profit and purpose are not necessarily at odds. Indeed, the rise of impact investing has demonstrated that they can – and often do – offer a fruitful union of priorities. The question of impact investing’s viability has been answered definitively, as evidenced by growth in assets dedicated to the strategy from $100 billion in 2014 to more than $715 billion in 2019, according to the Global Impact Investing Network.

We believe the second question, whether impact investing has a place in mature companies, can be answered in the affirmative as well. By porting the strategy into more mature enterprises, we believe that impact investing can be used to transform entire industries.

Key Tenets of Impact Investing

We recognize the important role of both government and philanthropy in addressing social problems, but we also believe that private enterprise can accelerate progress in ways that elude the public and philanthropic sectors, by bringing to bear the dynamism and flexibility that are the hallmarks of well-run entrepreneurial institutions. We also believe that many private companies today are only just becoming cognizant of their ability to effectuate enduring positive impact in the regular course of business. And we believe they will do so by adhering to three key tenets of the philosophy.

Collinearity. We define “collinearity” as the achievement of both social/environmental and financial performance through a mutually-reinforcing interconnectivity. Collinear relationships can be catalyzed in a number of ways, including the providing of products and services that address social and environmental problems, proactive capital allocation, impact-oriented incentive structures, and thoughtful and influential ownership, while at the same time generating financial returns. We view impact not as a concession but rather a driver of value and financial performance.

Intentionality. Intentionality is the expressed desire to actively and materially attain social or environmental benefit. Practically, intentionality can take the form of a clear and stated mission to achieve impact, active prioritization in company strategy on the achievement of impact objectives, and a commitment to measure the level of impact achieved over time. Impact investors can support and drive a company’s impact mission through various mechanisms, including impact-aligned compensation schemes and proactive capital allocation.

Additionality. Additionality is the concept of whether targeted positive impacts would have occurred without the existence of the company or the investment. Company Additionality occurs when there is a positive net benefit to society that would not have occurred had the company not existed. Companies are able to achieve additionality by offering products or services: (a) that otherwise would be unavailable; (b) at a clear cost, price, or accessibility differentiation from competitors; or (c) that provide key innovations to make other products and services more impactful. Investor Additionality can occur when the investor increases the magnitude of impact achieved by the company via the capital allocated or other contributions, including mentorship, relationships, and technical support.

Impact Investing at Scale

Size Matters. We believe that if the tools and approach of impact investing are applied to larger scale businesses, the impact potential is substantially greater both in aggregate and per dollar invested. Mature companies have the potential to drive longer-term, sustainable impact at a greater scale by virtue of their larger operational footprint, greater number of employees and suppliers, vast consumer bases, and their presence as a going concern, and as such, we believe these mature businesses can have a substantial influence over the communities in which they operate and the stakeholders they touch.

Private Capital’s Public Responsibilities. As the rapid spread of the coronavirus (COVID-19) continues to have devastating health and economic impacts globally, it has become increasingly clear from our perspective that government funding alone will not be sufficient to mitigate the virus’s deleterious effects. The events of the past year have also brought a renewed focus on the structural inequities that persist in our society today. They shine a light on the value of companies focused on managing social and environmental factors and their ability to generate positive impact.

The Future is Now. In many ways, the past year has been pivotal in further highlighting the value proposition at the core of impact investing: Purpose-driven investing strategies aimed at addressing social and environmental problems are part of the present and our futures.