Rise of social impact investing lays to rest the notion that greed is good
Andrew Sheng says putting money to work for benefit of society shows true entrepreneurial spirit
Do we really invest to make money? Yes, if you make money the old-fashioned way. You look at the trade-off between risk, return and liquidity and make the investment if it yields a return that you feel happy with, relative to the risk, with the liquidity you want.
There are, of course, two ways of investing. One looks at the fundamental value of the investment (the Warren Buffett way) and the other simply follows the crowd; the momentum play.
The biggest problem with the conventional way is that you assume your money will be used to do something useful for society and make a return for you. As we discovered during the last financial crisis, this is not necessarily so.
Sometimes, the most profitable companies are also the most polluting. A person may be investing in a company that acts against his or her religious beliefs or conscience. Investments can also have unforeseen side effects. During the Asian financial crisis, some large stockholders who lent their stocks to other shareholders to improve their yield and liquidity found these stocks were used to short-sell their stock prices.
Social impact investing arose because many enlightened investors decided they wanted to improve society or the environment without just donating to charity.
Utilising the entrepreneurial spirit of the marketplace can have a tremendous impact. The poor do not need charity - they prefer to be taught how to make money on their own and be given the chance to compete on an equal footing.
In 2010, the Rockefeller Foundation asked JPMorgan to do research on impact investment, defining it as investments that create a positive impact beyond financial return. At the end of the 1990s, many charitable foundations and governments realised they did not have enough funds to deal with all society's social problems. They decided that the best way to tackle them was to mobilise large-scale private capital for social good. That was easier said than done, particularly because the investment philosophy since the 1980s was for companies to "maximise shareholder returns". The idea that private greed created social good in the name of efficiency for shareholders was naive at best and socially damaging at worst. It created short-term behaviour that often sacrificed long-term value, not just for the company, but sometimes for society.
The Rockefeller-JPMorgan study identified social impact investing as a new alternative asset class. The asset class is not a group of assets, such as real estate or commodities, but the activities of companies that seek to make a social impact.
Social impact investing involves investing in or funding sustainable social enterprises that seek to make a change in society or the environment. They seek both financial returns and measurable social and environmental impact. While it is relatively easy to measure financial returns, it is much harder to measure success in social and environmental outcomes. This means that both the investor and the social enterprise have to work doubly hard to prove they are having an impact.
Impact investing faces several problems common to all start-ups. First, the average deal size is small, so the funds are not easily scalable.
Second, investors are wary of the beginning phase of projects, where the risks are highest.
Third, mainstream investors are still figuring out how to allocate resources to this new asset class, as there are no benchmarks to assess whether the fund managers deliver the required results.
Earlier this month, I listened to a husband and wife team lecture on how they decided to use the money they made in Silicon Valley to have an impact on society and the environment. They learned how to apply professional rigour and discipline to investing in sustainable social enterprises and thus were able to identify those more likely to succeed and then decide to help fund or raise funds for those social enterprises.
Their biggest success story is investing in an off-grid cooking stove for remote and poor Indian and African villages that has already reached commercial take-off.
Currently, nearly 250 funds are managing around US$26 billion in the impact investment market, which may grow to between US$600 billion and US$1 trillion by 2020.
More recently, insurance companies, pension funds and family offices are beginning to treat social impact investing as a mainstream investment class.
As pioneering Hong Kong impact investor Annie Chen, of RS Group, said recently: "Our environment is our most critical commons. We hope other family offices and investors will join us in tackling these issues. We can prove to the world that asset owners may truly do good and do well, and demonstrate how it is possible to steward wealth not just for future generations but for the common good."
Money has to be a tool for social good, not an end in itself. That is the true spirit of entrepreneurship.
Andrew Sheng is a distinguished fellow of the Fung Global Institute