This post was originally produced for Forbes.
Recently, I had the opportunity to moderate a panel discussion on impact investing going mainstream at the Los Angeles Sustainatopia conference. The panelists were all new to me; their insights really got me thinking. I’ve followed up with them in an effort to organize their collective thoughts.
Jonathan Storper, a partner at Hanson Bridgett who founded the firm’s sustainable law practice, effectively highlights the changing perception of impact investing, “Traditionally, impact investing was thought of as low profit or even nonprofit work. Increasingly, there has been the realization that there does not need to be any tradeoff between profit and purpose if the business has the right idea and is run in a disciplined manner.”
Paul Herman, inventor of the “HIP = Human Impact + Profit” ratings system and author of The HIP Investor: Make Bigger Profits by Building a Better World, agree, “ Investing to build a better world can be financially attractive. Sustainable products are growing revenue at higher-than-average growth rates.”
Garvin Jabush, cofounder and chief investment officer of Green Alpha Advisors, notes that the latest generation is helping to drive this shift, “There’s a general idea that I think people, particularly millennials, are now getting: the economy of the 19th and 20th centuries got us a long way, but from here, looking forward, it’s clear that this legacy economy is fraught with systemic risks, not the least of which are the worst effects of climate change and global resource scarcity.”
Seth Streeter, cofounder and CEO of Mission Wealth, explains the shift to impact investing, “ I believe the rapid rise of impact investing is a reflection of today’s society having an appetite to do ‘good’ per one’s own values.”
Storper points out that recent transactions are proving the validity of investing in social enterprises. He highlights the recent ETSY initial public offering, the sale of Method to Ecover and Plum’s sale to Campbell Soup.
One of the consistent themes developed as we discussed the latest thinking in impact investing is that divesting fossil fuels, for instance, is a prudent financial decision, regardless of your views on the environment or climate change.
“By choosing fund managers who select holdings for their funds (whether branded socially responsible or not), investors can benefit with potentially higher returns, lower risk, or both. Going fossil-free in your portfolio can accomplish this – including for university endowments and pensions — as oil, gas and coal have all dramatically lagged the general market over nearly 3 years,” Herman said.
Jabush notes that some have argued that advisors have a fiduciary responsibility to keep fossil fuels in client portfolios for the sake of diversification. “Nowhere in any fiduciary standard does a phrase like ‘must hold securities of fossil fuels’ come into play.”
“Obviously a part of being a prudent fiduciary is also about managing risk. Fossil fuels have significant embedded risk –beyond denuding our planet of scarce resources. Companies in the sector are debt laden and beholden to government subsidies and to supra national and national oligopolies to set prices and manage supply,” Jabush continued.
“The traditional assumption that divesting from fossil fuels will involve less than competitive returns has now been completely discredited,” he concluded.
Herman points out that risk reduction doesn’t relate only to fossil fuel divestitures, “Wind energy requires no fuel, and avoids volatility of oil and gas prices. Engaging employees encourages high retention, low turnover and thus higher productivity. And being innovative rather than extractive avoids legal lawsuits and penalties. All of these contribute to positive cash flow, profit and shareholder value at lower risk.”
Jabush agrees, “Now that there are 7.3 billion of us, our economic activities, for the first time in human history, are having existentially threatening effects. So, to prevent our own self-caused biggest threats coming home to roost, it’s time, or even past time, to change the way the economy works. So, folks are understanding that a way to do that is to change where capital is deployed. As long as we remain invested in the fossil-fuels based legacy economy, we’re going to get increasingly strong storms, acidic, rising seas, diminishing biodiversity, and all manner of risks from an increasingly warm planet. Impact can provide an alternative to investing in that future.”
The regulatory environment is shifting to allow for and even encourage social enterprise, Storper notes. “30 states and the district of Columbia have enacted for profit benefit corporation statutes allowing companies to combine profit plus purpose into the DNA of the corporate structure in a more meaningful and enforceable manner. Benefit corporations require purpose, accountability and transparency in addition to creating shareholder value.”
Furthermore, as the impact community becomes more sophisticated, impact measurement tools are beginning to allow social enterprises and investors to gauge their impact objectively. Storper said, “The “b corp” rating system helps measure what matters. In addition, groups like SASB (the sustainable accounting standards board) are developing industry by industry methods to take into account nonfinancial metrics.”
In addition to impact measurement, Streeter believes that we need to take a more holistic approach to defining wealth:
I have identified eight categories for wealth outside the financial definition. They include: physical health, emotional well-being, career satisfaction, thriving relationships, ample fun, social or environmental impact, spiritual connection and intellectual stimulation. Everyone has their own weighting scale as to which of these categories matters the most, because in the end, abundance is in the eye of the beholder. But by the traditional definition of wealth, a man who can’t climb two flights of stairs without being winded and who goes home emotionally distant from his wife and kids, yet has a huge balance sheet, would be considered wealthy.
Streeter also encourages other wealth advisors to focus on impact in their practices for practical and professional reasons beyond sustainability. “With mainstream investment management becoming more commoditized by the growth of higher tech, lower cost ‘robo-advisor’ platforms, conscious planning and investing is a differentiator in the marketplace, especially for the huge Millennial demographic who gravitate to more purpose-led initiatives.”
“Advisors will find more purpose and meaning in their own career and thus enjoy a ‘reboot’ to loving what they do on a daily basis even more than they did before,” he concludes.
The panel discussion was surprisingly upbeat, reflecting the optimism of the panelists that impact investing presents a key part of the solution to major world problems, including climate change. Jabush’s comments are representative of the mood of the panel:
In the next few years, trillions of dollars will be invested in efficient, innovation-driven tech, in solutions to the systemic risks with the power to disrupt the global economy, and in other mitigations and adaptations to the worst outcomes of climate change. This ‘great transition’ towards a global economy that can thrive side-by-side with its ecological underpinnings is now clearly underway. I believe that investing in solutions to our most dangerous risks is the clearest path to a sustainable economy, and also to competitive returns.”