It’s Settled: We can Stop Referring to Impact Investing as an Asset Class
By Impact Team at Athena Capital Advisors
In 2010, J.P. Morgan Global Research and The Rockefeller Foundation published a report that introduced the concept of impact investing to a mainstream audience. The research note -- the first of its kind to provide a benchmark for historical performance – referred to the broader impact investing segment as “an emerging asset class,” both in its title and throughout the research. While this characterization may have helped the unfamiliar get their arms around the opportunity, most active participants today view this description as one that mischaracterizes and understates the potential of impact strategies across a multi-asset class portfolio. Indeed, this was one of the many takeaways from the impact investing panel at Harvard Business School’s annual Private Equity and Venture Capital Conference held in January.
Speaking on the topic were panelists Chris Cozzone, Vice President, Bain Capital Double Impact; Michael Etzel, Partner, The Bridgespan Group; Liqian Ma, Managing Director, Cambridge Associates; Nancy Pfund, Founder and Managing Director, DBL Partners; and Athena Capital’s William McCalpin, Managing Partner, Impact Investments. Harvard Business School Senior Lecturer of Business Administration Vikram Gandhi moderated the discussion, which covered everything from the ongoing maturation of the impact investing segment to strategies for measurement.
As it relates to whether or not impact investing fits the definition of an asset class, Chris Cozzone perhaps summed it up best: “There’s a definition of what an asset class is and impact investments are not an asset class. We view impact as an investment style and a way to both source deals and add value that is different from other types of pure financially driven investment strategies.”
To some, this may seem like splitting hairs. However, as the panelists made clear, the mischaracterization of impact investing as its own discrete asset class can do harm, both for investors seeking to incorporate values-based strategies into their portfolios and for the industry at large.
Nancy Pfund, for instance, described that in the early days, as a VC, she might have gone into a family office that perceived DBL pursuing a “do-gooder” strategy that seemed completely different from what other VCs were pursuing at the time. To give earlier investors “something to hold onto,” she noted that many would describe impact as its own asset class. The problem, she added, was that this depiction makes impact-oriented managers seem too different and, importantly, that such a characterization actually takes away from the disciplines that drive success.
Pfund highlighted as an example an evolution in which entrepreneurs and other VCs now recognize the value that impact investors can bring to their business. As a result, founders are keen to bring VC firms such as DBL in as a lead investor in order to instill an impact lens that can impart a material competitive advantage in their respective market.
Bill McCalpin, meanwhile, highlighted that beyond the “asset class” mischaracterizations, the need for a common, standard language remains one of the biggest hurdles when it comes to educating investors about the opportunity. As part of the discussion, he highlighted the boundaries that separate SRI, ESG and Impact investments, and noted that each category tends to be associated with specific asset classes, be it public equities and debt or private equity and real assets. (In fact, this is a topic that Athena’s recent research paper, “Impact Investing: History and Opportunity,” covers comprehensively.)
Similar to any new investment area, the continued growth of impact investing will require ongoing standardization around nomenclature in order to drive understanding and build broader appeal. So while the “asset class” characterization may have helped create traction early on, today it’s actually presenting a challenge to communicating the breadth of possibilities available across all asset classes and across a spectrum of financial- and social-return profiles.