SEPTEMBER 2016

Webinar Recap: Defining Impact

Category: Impact Investing

A recent Fidelity webinar series featuring Athena Capital Advisors and The Global Impact Investing Network provided a primer on impact investing for family offices.

jeff-finkelman_220x190By Jeff Finkelman, CFA, Research Associate, Impact Investing

This summer, Athena Capital Advisors joined the Global Impact Investing Network in presenting a series of online seminars hosted by Fidelity Family Office Services. The seminars, conducted during the last two weeks in June, provided an introduction to impact investing and also highlighted several practical considerations for those interested in pursuing socially-driven investment strategies.

At the start of the event, we polled the audience to gauge their understanding of the topic. We asked them to indicate if they believe there are any differences between impact investing, socially-responsible investing (SRI) and so-called “ESG” investing.  Roughly half of the survey respondents said “no.”  In fact, though they all sound similar, these terms describe three distinct ways investors incorporate non-financial factors into their investment decision-making process.  But given the nascence of the impact investing industry, it’s no surprise that investors remain confused about what “impact investing” means and how it works.

To arrive at a definition of impact investing, it helps to first understand the objectives of its close cousins, SRI and Environmental, Social and Governance (ESG) investing. SRI can be thought of as a “do no harm” approach to investing, in which investors focus on aligning their portfolio with their values.  Using a negative screening approach, SRI investors eliminate from their portfolios any investments associated with industries or business practices they find objectionable.  For instance, an SRI investor concerned about public health might exclude any companies that generate more than 5% of their revenue from the sale of tobacco products.

ESG investing is a more strategic approach. Rather than limiting themselves to negative screening, ESG investors integrate social and environmental factors into their analysis of an investment’s potential financial risk and reward.  For instance, an ESG investor concerned about climate change and convinced that the transition to a renewable energy economy is underway might maintain an overweight to utilities that are actively acquiring clean energy assets. ESG investing enhances an investor’s ability to build a values-aligned portfolio, but most ESG investors would argue that it also has the potential to enhance their risk-adjusted financial returns.  In their view, companies with superior governance characteristics, whose management teams pay attention to material ESG risks and which capitalize on ESG-related business opportunities will be better positioned than their peers for long-term growth.

To explain the ins-and-outs of impact investing, Athena was excited to have Giselle Leung, a Director with the Global Impact Investing Network, as partner in the first part of the webinar series.  The GIIN is a leading impact investing institution and has played a key role in building consensus behind both the core characteristics of impact investing and best practices in its implementation.  As Giselle explained, the GIIN defines impact investments as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.”  Like SRI and ESG investments, impact investments are made with an expectation of achieving some level of financial return, but they differ in several important ways.

socialFirst, impact investments are made with the intention of generating some type of positive impact.  Secondly, as Leung pointed out, the intention to generate impact also motivates impact investors to measure the actual social or environmental impact of their investments.  The data they collect is then used to inform their investment decisions, from asset selection and due diligence to portfolio management and business initiatives.

Though SRI, ESG and impact investments can be made in every asset class, these approaches do lend themselves to some asset classes more than others.  SRI and ESG investments are most often associated with the public markets, while impact investing is concentrated in the private markets.  Alternative investments, such as venture capital and private equity, attract impact investors because there is such a direct connection between the capital invested and the impact achieved.  This allows investors to more easily express their intentionality and measure the results.

While Part I of the webinar series provided an introduction and helped demonstrate the growing scope of the impact movement, Part II delved into practical applications and highlighted examples of various model portfolios, featuring different themes, return profiles and asset-class mixes. Part I, available to those who register, can be found here, while Part II can be found here.

Giselle and I were joined in the first webinar by Kate Huntington, Managing Director and Co-Head of Research and Manager Selection at Athena.  In Part II of the webinar series, Kate represented Athena along with our colleague Michael Lear, Vice President, Portfolio Manager and Head of Athena’s New York office. They were joined by GIIN staff members Hannah Schiff, a Research Manager, and Kelly McCarthy, Senior Manager, IRIS & Impact Measurement.

Jeff focuses on socially-responsible, ESG and impact investing across all asset classes.  Working closely with Athena’s Portfolio Managers, Jeff helps identify and assess investment opportunities that align with client values or which have the potential to generate positive impact in areas of interest to clients.  Jeff also represents Athena at impact investing related industry events and contributes to client communications on impact related issues. Prior to joining Athena, Jeff was an Investment Officer with the Office of Investment and Innovation at the U.S. Small Business Administration, an agency of the federal government.

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