Later this week, I will appear on a panel at Confluence Philanthropy’s annual practitioner gathering. The ambitious, yet ambiguous title of our session is, “The Values Discussion Every Mission Investor Needs To Hear.”
The description of this session claims that there is a “growing creative tension in the discipline of values-aligned investing” centered on “the nuanced difference between the tried-and-true methodologies of SRI/ESG investing and direct investing for impact.” Our goal as a panel is to address two fundamental questions:
(1) Is there a difference between SRI/ESG investing and direct investing for impact; and
(2) Do investors need to make choices between these two methodologies?
These are questions that we, at Ceniarth, have spent significant time reflecting on this past year.
First, is there a “nuanced difference” between SRI/ESG investing and direct investing for impact?
Absolutely. The difference is not nuanced, it is categorically complete. In fact, we believe that lumping these two different disciplines under the same broad practitioner’s umbrella called “Impact Investing” is a significant source of confusion and stasis in the industry.
Many are fond of framing the difference between these two fields specifically around the topic of returns. SRI/ESG investing, as the story goes, seeks to generate market-rate returns while aligning investments with an institution’s values. Investing for impact, meanwhile, connotes a tolerance for concessionary or under-market returns if a social impact can be generated. Both of these concepts are still rooted, however, in the idea of building an investment portfolio with the goal of producing returns (not to mention the fact that the subjective notion of a “market-rate” is a concept that only a traditional wealth manager would love).
We believe that the real difference between practitioners in the market is not a function of rates of return, but rather intentionality and goals. The lack of clear intentionality leads many institutions to be stuck in a murky middle, perpetually debating the question of tradeoffs between returns and impact. We believe that the difference between practitioners would be better framed around goals.
One discipline, the one more commonly associated with SRI/ESG Investing though not exclusively so, is focused on a goal of investing money for some target return guided by an individual institution’s values. That return target will vary based on institution, but fundamentally, the goal of this discipline is investing. It will be values-aligned, and it may produce important social outcomes and impacts, but ultimately, that capital pool has a return metric that must be considered.
This is not to understate the importance of this form of investing. It is a field that has grown in leaps and bounds over the past decade thanks to the tireless efforts of many of the advisors and foundations that make up the Confluence membership. If you are an individual or institutions that wishes to invest in alignment with your values while continuing to target specific financial return criteria, you can, with knowledgeable support, make this happen. The availability of products and advisors that understand how to do this has been steadily increasing.
We would argue that there is an all-together different discipline however, “investing for impact” for lack of another phrase, that frames the ultimate goal in terms of solving specific social or environmental problems. This discipline begins by assessing systematic gaps in particular challenge areas and crafting solutions that are judged by their efficacy in generating outcomes. Depending on the issue area, practitioners might seek to generate vastly different rates of return, or no return at all. The significance of the return rate is only viewed through its importance as a lever for generating, or impeding, outcomes.
There may be some challenge areas, for example, off-grid energy access, where generating attractive and predictable returns is one of the answers to drawing the necessary institutional capital needed to produce outcomes (i.e. more people with power) at scale. There may be other sectors, for example, solving rural water purification or healthcare challenges, where grants, PRIs, or very low returning capital interventions are the right answers.
The key point is that the practitioner pursuing impact is looking for systemic solutions regardless of the return profile.
This leads us to our second question, “must investors make choices between these two methodologies?
To be most effective, we believe that the answer is yes. However, this does not mean that an institution cannot pursue both in tandem. It simply means that pools of capital should be segregated and managed by individuals, teams, or advisors with different mandates and metrics.
At Ceniarth, we have chosen to pursue both. We manage certain asset pools in partnership with Hall Capital Partners in a strategy that we call Full Consequence Investing (FCI), our version of SRI/ESG. Our expectation is that these pools of capital will produce meaningful financial returns by relying on managers that have a genuine appreciation for how ESG factors impact long-term investment performance. In parallel, we are building internal capacity to deploy additional capital, both commercial and philanthropic, through emerging program areas empowered to think from a pure impact and solutions perspective.
We find that many institutions get stuck by mixing up these two paths and not making clear choices.
If you are an institution in the audience primarily thinking “how can we manage our assets or endowment in a way that better reflects our values?”, I would encourage you to not get bogged down in long discussions about direct impact and rather meet some of the advisors seated around you who can competently help you begin implementing well-proven SRI & ESG strategies. You should bypass the endless debate over returns vs. impact and simply get on with the task of values-aligned investing.
If you are asking the question “how do we use our assets or endowment to directly solve a specific challenge area?”, I would encourage you to find a way to separate that conversation from your investing dialogue and to begin building the capacity, or looking for it externally, to identify market gaps and paths to outcomes rather than “investment opportunities”. I would try to segregate a pool of capital that your institution can comfortably divorce from return expectations. Depending on your issue areas, you may ironically end up generating better financial returns than your SRI/ESG strategies, but the key point is that the pool will be managed to outcomes, not returns.
In many ways, the distinctions discussed in this piece are academic and semantic and yet these discussions paralyze many institutions with good intentions. Both fields, ESG/SRI investing and direct investing for impact, have advanced substantially over the past decade and both are very viable methodologies for fulfilling the mission of your institution. The key decision lies in initiating action. Choose one path or choose both, but choose something and get on with it. The only wrong choice is to do nothing.