Integrated Investing
Page 5
In 2007, impact investing emerged as a prevailing solution for a more purposeful approach with the intent of addressing some of the negative social and economic impacts arising from traditional approaches to investment decision making. But this new form of investing is not without its challenges. Even now, as impact investing is starting to break into the mainstream, it is often as opaque and complex as conventional approaches.
In some cases, practitioners and companies in the burgeoning impact investment sector have started to apply financial and investment models, processes, and approaches borrowed from the very system that collapsed in 2008, which is a frustrating revelation. Applying conventional investment approaches to purpose-driven companies or businesses with a social mission embedded in their business model is not the solution.
In this chapter, I peel back the onion layers of impact investing by getting back to basics about impact investing and drawing the connection between it and access to essential resources. First, I share from where impact investing emerged, present three ways of describing what “impact” is, and explain why impact is, by nature, personal.
The Emergence of Impact Investing
The new approach to investing that emerged in response to people seeking a more positive alternative to conventional approaches goes by many names. I will use the term “impact investing” to broadly describe this field, which is often also referred to as social investment, social finance, triple-bottom-line investing, values-based investing, and mission-related investing.
In 2007, the Rockefeller Foundation convened a meeting “to explore with leaders in finance, philanthropy, and development the need for, and ways and means of, building a worldwide industry for investing for social and environmental impact.” At this meeting, people started to use the phrase “impact investing,” and so it was coined. This was a big deal. The White House announced a national impact investing initiative in June 2013. The description of impact investing included the movement of capital toward businesses, with the intention of generating economic return as well as benefit to the public. It was seen as a concept whereby businesses measure environmental, social, and governance (ESG ) considerations in addition to measuring financial returns. The White House also referred to commonly used terminology such as “shared value” and “social enterprises.”1
What Is Impact?
In Chapter 2, I proposed a definition of investing: contributing resources, typically financial in nature, to businesses with the anticipation of generating a long-term future benefit, outcome, or return. But where does “impact” come in?
Impact is connected to the access to essential resources and can be described in the three following ways:
Empowering people and the planet and not exploiting them
Creating more equal societies
Taking care of the village
Let’s go over these in detail.
Empowering People and the Planet
Impact investing is investing in businesses that through their value proposition, relationships, and business practices empower customers, employees, suppliers, and other stakeholders. Impact investing works with businesses that do not exploit people and the planet, and is itself never exploitative.
As we discussed in Chapter 1, the essential resources we need fall into six categories:
Sustenance (examples: food, clean water, shelter, energy)
Expression (examples: through speech, writing, creative, and artistic endeavors, in what we wear, and through our culture)
Connection (examples: we meet in person, we talk over the phone, we travel to see each other)
Managing Change (examples: information, bank accounts where we can save for a rainy day, insurance)
Making Decisions (examples: information, decision-making tools)
Exchange (examples: money, alternative currency, barter goods)
People become more empowered when they have the essential resources to sustain and express themselves, connect with others, manage change, make decisions, and have a means of exchange. When people have improved access to the essential resources they need to do the things in life to survive, thrive, and be happy, more equal societies result.
Payday Loans: Helpful or Exploitative?
Consider a situation in which you have the opportunity to invest in a new company called MoneyGrabbr. The company loans money to people with poor credit histories and credit scores who would otherwise not be able to borrow from a bank. MoneyGrabbr has a convenient website through which its customers can specify the amount they want to borrow and for how long. It would cost $ 69 to borrow $ 300 for fourteen days, meaning an annual rate of 599.64%.2 MoneyGrabbr loans are known as payday loans because the money is lent to the customer in advance of a payday and is intended to be repaid with the next paycheck. However, customers often find themselves short of cash on payday, making meeting their current financial demands and paying off the loan from the previous pay period impossible. Customers who are unable to pay down their loans when they become due often renew their loans or borrow more, creating an endless cycle of borrowing.
A company like MoneyGrabbr can potentially be a lucrative investment opportunity, as the recurring interest revenue it generates can be significant, but payday loan companies are often criticized for exploiting cash-strapped customers.
Then a company called LoanSaver comes along. It also loans money to people who have difficulty accessing loans from banks, but it only does so if the customer can set aside a small amount of money as security for the loan. That loan security is placed into a savings product. The intention of LoanSaver is to help its customers learn how to grow their savings and manage their money more responsibly. An investment in a company like LoanSaver has the potential to yield a financial return, since, similar to MoneyGrabbr, it grows its revenues through the interest it collects. Unlike MoneyGrabbr, however, LoanSaver also creates positive social impact by helping its customers break out of the cycle of depending on high-interest short-term borrowing like payday loans. LoanSaver not only gives its customers access to essential resources of exchange (money), but also to managing change (savings) and making decisions (education around managing their finances).
Impact is about empowering people, and people are empowered when they have access to essential resources. We are able to influence impact through our investment decisions, including the choices we make about which businesses get started and grown, and about how businesses are led, managed, and operated, and how they serve people. When determining whether something is an impact investment or not, the differentiating question is, “Does the business exploit people and the planet or empower them?”
Creating More Equal Societies
Also in Chapter 1, I talked about how businesses enable people to access essential resources. Impact happens when businesses enable a change or improvement in how essential resources are accessed:
Basic access: People who do not have access, gain access (examples: shelters for homeless people, affordable housing for people on low incomes, agriculture systems for communities on the brink of starvation)
Efficient access: People who already have basic access are now able to access resources more efficiently (examples: wide-scale agriculture for more efficient production of food, larger distribution systems, replacement of one-to-one tutoring with schools for more efficient delivery of education)
Choice: People who have basic and efficient access now have choice in the type of resources they access (examples: fair trade, organic products, buying local rather than buying products mass-produced overseas)
Convenient access: People who have basic and efficient access now have convenient access (examples: smartphone apps that help people find the nearest coffee shop, stores with the products and services you need, when you need them in close-by locations, ordering products online that are delivered quickly to your door)
Employment: People who can access essential resources for ex-change (money, in the form of wages and salaries) or some of
the other types of essential resources (free room and board, for example, provides someone with essential resources to sustain themselves)
Supplier: Ethical sourcing and purchasing is another way to give others access to essential resources (such as sourcing coffee beans from a cooperative, organic coffee producer in Peru, sourcing clothing wholesale from factories that pay a living wage, or buying fresh produce from a local, urban farm that hires people from the local community who experience barriers to traditional employment)
Giving someone luxury access to resources—that is, giving people at the basic, efficient, choice, and convenient levels further access to resources in excess (luxuries)—does not create more equality. In fact, it has the opposite effect by increasing the inequality gap.
When I talk about impact, I focus on changes in access that relate to basic, efficient, or choice access. For a business that provides people with convenient or luxury access to products and services to be considered positively impactful, it must be the source of improvements in people’s access to essential resources through employment or the supply chain. For example, inclusive hiring policies that create jobs for people who have experienced long-term unemployment, who are homeless, or who have disabilities improve access to essential resources through employment. A coffee-grinding business that sources its coffee beans directly from farmers and ensures that they are fairly compensated improves the access to essential resources for the farmers through the supply chain.
Inequality is typically measured in terms of income, but it really means differences in people’s level of access to essential resources. Inequality affects people at the bottom end of the wealth spectrum the most, but it also affects people at the top.
Richard Wilkinson is a British researcher who focuses on social inequalities. He retired from teaching in 2008, is Professor Emeritus of Social Epidemiology at the University of Nottingham, and is the coauthor, with Kate Pickett, of the book The Spirit Level: Why More Equal Societies Almost Always Do Better.
Wilkinson believes we intuitively know that rising inequality gaps (measured by relative income) are a problem. Through his extensive research, he unearthed data demonstrating how more equal societies are healthier and happier. Using metrics such as life expectancy, math and reading literacy amongst children, infant mortality rates, homicide rates, proportion of the population in prison, teenage birthrates, levels of trust, obesity, mental illness (including drug and alcohol addiction), and social mobility, Wilkinson’s research evidenced that more equal societies had higher
life expectancy,
literacy rates amongst children,
levels of trust,
social mobility.
His research also demonstrated that more equal societies had lower
infant mortality rates,
homicide rates,
proportion of the population in prison,
teenage birthrates,
obesity,
mental illness,
drug and alcohol addiction.
Using the data available on the health and social problems listed above, Wilkinson and Pickett formed an index of health and social problems for each country and each US state. Each item in the indexes carries the same weight, and the higher the score, the worse the outcome. Countries with low inequality, such as Japan, Finland, Norway, and Sweden, scored better on the index of health and social problems, whereas countries with high inequality, such as the US , Portugal, and the UK , scored the worst.3 American states with low inequality and better index scores included Utah, New Hampshire, and Wisconsin. At the other end of the spectrum, with high inequality and worse index scores, were Louisiana, Alabama, and Missouri.4 Although the US state data scatter widely around the trend line, the correlation between inequality and the index of health and social problems is clear.
In The Spirit Level , Wilkinson and Pickett note a correlation between trust and inequality. They noted the highest levels of trust amongst people in the Scandinavian countries and the Netherlands, countries where the income inequality gap is small. For example, in Sweden, 66% of the population noted that they feel that they can trust other people. Contrast that with Portugal, where only 19% of the population said the same. Differences in income in Portugal are high.5
Although a number of factors besides inequality affect women’s status, Wilkinson and Pickett found, using measurements by the Institute for Women’s Policy Research, that it tended to be worse in US states with high inequality, including Louisiana, Alabama, and Missouri. In more unequal states, women earn less, and fewer women vote, hold political office, or complete college degrees. Comparing different countries, we see that a number of factors influence women’s status, but there is an unmistakable, visible trend toward women having lower status in more unequal countries.
Improving Wages: Living Wage and Income Equality
The MIT Living Wage Calculator noted that low-income families in many parts of the US do not make a living wage. That is, many families do not make sufficient income to afford the high cost of living in their community.6 In countries around the world, campaigns have been launched to encourage businesses to pay each of their employees a wage sufficient for an employee to meet their basic needs, or to encourage policy makers to establish laws requiring a living wage. Although basic needs may differ somewhat from country to country, they include subsistence such as shelter (housing), clothing, and the basics for quality of life —food, utilities, transport, health care, and some recreation. Education, family care (children and elderly), saving for retirement, legal fees, and insurance may or may not be included. The MIT Living Wage Calculator provides a useful illustration comparing the minimum wage, poverty wage, and living wage across different family compositions based on location. The living wage in a given place is typically significantly higher than the minimum wage, especially for adults supporting a family with young children. An investment in a company that adopts a living wage policy could be considered an impact investment because such a company is attempting to give their employees improved access to essential resources, and possibly shrinking the income inequality gap.
In April 2015, Dan Price, CEO of Seattle-based company Gravity Payments, took reducing income inequality a step further. He announced that he was setting a minimum wage of $ 70,000 for all of his company’s employees. The policy will be phased in over the course of a few years, and Price is cutting his $ 1 million salary down to $ 70,000. In a city where the cost of living is higher than the US national average (24% above the national average, according to PayScale, mainly due to the high price of housing), Price made the decision to adjust the minimum wage in his company in a bid for greater income equality among the employees. In an article in Time , Price talked about hiring and retaining talent based on providing an opportunity to serve others and grow in their roles, not just an opportunity to make money.7 His approach echoes one of my strong beliefs—by taking the issue of money off the table, staff worry less and can focus on work. When people are living paycheck to paycheck, it can be distracting. Because its bold policy on income equality is an attempt to empower its employees, an investment in a company like Gravity Payments could be considered an impact investment.
Investing as Taking Care of the Village
“Taking care of the village” means doing things that take care of us, our families, our neighbors, our communities, future generations, and our planet. It is the idea that to have a happy, thriving life, we really must realize that we are interdependent and that operating in isolation is not good for our well-being. It takes a village to do the things that matter.
In a village, there are multiple stakeholders whose interests must be met, and there are future generations who will inherit it from us.
This means making investment decisions with the village in mind. It means evaluating whether the people we invest in have the same aim and mindset, and it means assessing whether the businesses we invest in serve the goal of taking care of the village. In this approach, we choose t
o invest in businesses that meet our needs and those of our families, our neighbors, our communities, and future generations, while also taking good care of our planet.
Investing with this mindset is different from seeing it as an extrinsically rewarded game, which is what business and many things in life have been reduced to. We think game play is a good motivator or incentive structure, but this is where negative consequences can arise. Games can be manipulated, especially where they are primarily extrinsically rewarded. Investing as a game is characterized by people aiming for high scores (higher and higher investment returns and business valuations, and chasing more money for themselves for its own sake) and knocking all their opponents off the playing field (creating greater inequality). This leads to less regard for other people. Investing as an extrinsically rewarded game puts us at risk of forgetting that real people are involved.
Taking care of the village puts the intrinsic motivation back into our activities and people back into focus.
Investing as taking care of the village also empowers a diverse community of people to invest in businesses and make decisions about their future. If we do not have diversity among investors, we perpetuate the same systems that have resulted in more unequal societies and the exploitation of people and the planet.