On the subject of impact investing, Netscape founder Marc Andreessen reportedly said, “It’s like a houseboat—not a very good house, not a very good boat.” To which I hear someone else replied, “I prefer to think of it like brunch—better than breakfast, better than lunch.”
I got to spend a day last week at a White House roundtable on impact investing with administration officials; members of Congress; the Secretary of Labor; senior people from the departments of Treasury and Energy; the Small Business Administration and U.S. Agency for International Development; and representatives from major foundations, families and institutional investors. Those of us from the private sector made over $1.5 billion in new commitments to impact investments, including an estimated commitment of $126 million by Abacus clients. The roundtable was organized to coincide with the release of a report by the National Advisory Board titled “Private Capital, Public Good: How Smart Federal Policy Can Galvanize Impact Investing—and Why It’s Urgent.” The report defines impact investing as generating “measurable, beneficial social or environmental impacts alongside financial returns.” Or as Jean Case of the Case Foundation (formed in 1997 when AOL went public) said, “It’s a new solution to old problems.” (You can read Jean’s HuffPost blog about the day here.)
Creating a More Robust Impact Investment Ecosystem
The report is really directed at government policymakers, making specific recommendations about how they can help catalyze a more robust impact investment ecosystem. One example of how government could help at no cost is the Employee Retirement Income Security Act of 1974, which says that pension plan fiduciaries must act prudently, diversifying their investments to reduce the risk of large losses. These fiduciaries oversee trillions of dollars in assets. In 1994, the Department of Labor (DOL) provided formal guidance that fiduciaries could consider targeted environmental and economic concerns. But in 2008, the DOL reversed course and said that they “may never subordinate the economic interests of the plan to unrelated objectives.” This froze many in their tracks. And similar fiduciary standards apply to those who manage money for charitable foundations, trusts and SEC Registered Investment Advisors. If the DOL were to come out with clarifying guidance allowing fiduciaries to consider social impact when they can reasonably believe that returns won’t suffer, the government would free up huge amounts of capital. There are many other examples in the report.
Good Investing vs. Impact Investing: What’s the Difference?
Tom Perez, the Secretary of Labor, had some pretty cool remarks. He didn’t really get the difference between impact investing and just good investing. He said that he was recently visiting a woman who owns nine Ace Hardware stores throughout D.C., and she pays her people well over minimum wage. He asked her why, and she said it’s how she keeps turnover down. Apparently, we’re the only industrialized country without a federal paid family leave policy. Companies that are the first in their cohort to offer it see their stock prices rise, according to Secretary Perez. He said, “Shouldn’t we call this ‘acting in your enlightened self-interest’?” At Abacus, we’ve found that sound impact investing can earn the same return as “non-impact” investing. Indeed, a Mercer Consulting synopsis of 36 papers published between 1995 and 2009 states that the majority of them found that incorporating environmental or social screens had a positive effect on performance—the opposite of what most people believe!
My favorite quote of the day was from the chief investment officer of one of the largest insurance companies in the world: “The notion that what makes a good fiduciary investment and what makes a good social investment are distinctly different is just not correct.” The meeting was a great example of government and the private sector coming together to solve our biggest societal problems.
You can read the White House blog post on the event here.
