The investment community is coming to a powerful consensus: Investments have impact. When you match unused capital with an unfunded need, the magic of business happens. That business has a first-order effect: making money. It also has a second-order effect: profitability. The emerging consensus I refer to is that the second-order effect is worth assessing and even optimizing.
If that sounds like “impact investing” to you, you’re not totally off base. But that’s not what I’m talking about. Impact can be intentional or unintentional, but it can’t be avoided. Given that, doesn’t it make some sense, at minimum, to understand the follow-on effects of making an investment?
Attendees at the 68th CFA Institute Annual Conference were treated to presentations from three speakers with four C-suite titles among them. Nell Derick Debevoise, Russell Read, CFA, and Klaus Tischhauser together provided a mountain of perspective that amounted to a “take what you want” buffet. If you’re looking for a quick primer on impact investing, you could do a lot worse than sitting down with a notepad and watching the recording of the session.
But if you are still a bit skeptical about the notion of incorporating social good into your portfolio, that’s understandable. For whatever reason, it is difficult for many people to think that a profit motive can be combined with something that improves the world. That’s unfortunate, but it comes from a good place. After all:
Investing Is Not a Philanthropic Enterprise
It would be great if the trillions of dollars entrusted to financial intermediaries could be devoted directly and wholly to social good. But that’s not the way the world works. People entrust professionals to grow their assets so they can use them in the future. Making investment decisions without a focus on return makes that harder, and it harms our clients. That is infinitely worse than getting fired (which is also nearly certain to happen if you forget about your responsibility to seek a fair return).
So it’s a good thing you can actually find excellent returns by considering the impact of your investments. Tischhauser tossed a chart of his fund’s returns up on the screen, and it went from bottom left to top right just like it was supposed to. There are return streams here that can be accessed.
There may also be enduring edge. If one considers an almost stereotypical case of investing with impact, where one acts as a microfinance lender in a capital-starved market, it starts to become clear that if you get it right once, you might be able to get it right again. It also demonstrates that the local business environment might be quite uncorrelated with activity on Wall Street or anywhere else. Uncorrelated consistent returns are the holy grail of the investment industry. Wouldn’t it be great if you could earn them by helping people?
It would. That doesn’t tell you how to do it, but it does convey the promise. A great number of funds are showing interest in these strategies. But you don’t have to take my word for it. As Richard Brandweiner, CFA, who runs a $45-billion-plus superannuation fund (think pension fund if you’re not Australian), said at the beginning of the session, “Investing with purpose is not a fringe idea, but we need to learn to do it better.”
Fortunately, Attendees Did
Here are a few quick things that you can do to catch up to those who made it to Frankfurt in the flesh:
- Read Michael E. Porter and Mark R. Kramer’s “Creating Shared Value.” It was widely referenced by speakers on this topic throughout the conference, and I’m personally very much looking forward to spending some quality time with it, especially if it’s at all as good as Porter’s “What Is Strategy?“ Debevoise suggested taking a look at the latter, as well as some other good next steps:
- Learn goal programming. It looks a bit wonky, but I found listening to Read’s explanation of the discipline in the video above to be immensely clarifying. Goal programming is a system of balancing competing objectives that he suggests is a much better version of the asset allocation thinking that has been used in finance since the early 1960s. Time to upgrade your toolkit!
- Shift your perspective. Tischhauser noted that he first did this by taking a bike ride from Geneva to South Africa. The poverty that he witnessed led him to brainstorm creative solutions and ultimately start his own fund. Andrew Sheng noted in the earlier “Long-Termism and the New Era of Fiduciary Capitalism” panel that the sovereign wealth fund of Malaysia asks its employees to pursue a similar course. Travel somewhere without a capital market and think creatively. It can’t hurt.
— William C.G. Ortel (@wcgortel) April 29, 2015
Ultimately, we need to remember something critical in evaluating allocations to these countries: Poverty is a lack of choice. Investors raised in developed economies may not understand the firsthand experience of the very poor, but they can certainly grasp, at an atomic level, that entrepreneurship is about creating new choice.
Backing entrepreneurs is also a great way to make money.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: W. Scott Mitchell