By David Stripling
Last spring, while preparing for a business case challenge, I learned about a new investment approach that blends social and environmental impact with financial return--Impact Investing. I happened to be part of a team that was trying to help scale Habitat for Humanity to help serve 50 million people in 10 years, and we were wrapping our minds around the problem: "how can we make sure there is capital for our solution?" In a search to answer this question we stumbled on the incredible work being done by impact investors across the globe. Before us we found a new way of thinking and investing that is changing the world by bringing the necessary capital to social entrepreneurs.
While finishing my fourth semester as a part time student in Presidio Graduate School’s Business program, I had the first-hand experience of how this new investment space actually works. I became a Fink intern working at Sonen Capital LLC, an impact investment firm that works with investors to make financially compelling investments with meaningful social and/or environmental impact. Since becoming an intern, I not only became familiar with the landscape of impact investing, I also had the chance to contribute to the investment selection process by assisting with due diligence on some of Sonen Capital’s investments.
The thematic sectors they invest in include renewable energy, microfinance, low-income housing, small social enterprise funds, water conservation, forest conservation, and others.
Sonen Managing Partner and Founder Raul Pomares defines the basic approach to impact investing through two types of investors, financial first and impact first investors:
1. Financial First Investors seek to optimize financial returns with a floor for social/environmental impact.
2. Impact First Investors seek to optimize social or environmental returns with a financial floor. This group uses social/environmental good as a primary objective and may accept a range of returns, from principal to market-rate (Godeke and Pomares, pages 11-12).
While the broader investing landscape is comprised of traditional investors who consider returns first, some investors have sacrificed returns to generate social or environmental impact.
Sonen has researched and compiled in depth information on several thousand fund-managers within the global impact space, constructing portfolios that don’t sacrifice financial returns to create impact. By focusing investments on specific growth areas with social and environment themes, Sonen is able to generate market rate returns.Through their research, they have developed critical impact investing capacities that include 1) comprehensive knowledge of the sphere, 2) investment infrastructure, 3) access to extensive deal flow, and 4) and portfolio strategies that enable Sonen to recommend investments that suit specific thematic, and impact criteria to their clientele.
Through the internship I also gained exposure to performing due diligence on investments. The due diligence process requires a survey of the investment team, the consistency of financial returns, the strategy and theme they are focused on, the market, and most importantly, the impact of the fund. Having insight into the criteria investors use when selecting investments gave me tremendous insight into the minds of investors. Obviously there are reputational and financial risks every time an investor selects a fund for investment. Creating a systematic and disciplined process and documenting the decision criteria gives the investors a frame to avoid making purely gut driven decisions, and also gives the team an opportunity to perform a “lessons learned” exercise should an investment go sideways.After my experience I believe developing standards of excellence for impact metrics is one of the main learning edges of impact investing as a sector.
Impact investing is an emerging approach to investing that is transforming the financial landscape. The approach expands the functions of the socially responsible investing beyond the‘negative financial screen.’ Instead it offers the opportunity for a new class of “social entrepreneurs” to gain much needed access to capital to create economic and social value. Having gained insight on how this sector is evolving from the inside gave me a great chance to learn how investors select investments, as well as how investor’s have innovated new methods of selecting them. The sector is young, evolving, covering ground very rapidly, and is filling a great need to nurture a new kind of business. I am pleased to have explored this sector first hand at Sonen, and look forward to my next chance to work in impact investing.
Godeke, Steven and Pomares, Raul (2009) Solutions for Impact Investors: From Strategy to Implementation. Rockefeller Philanthropy Advisors, pp 11-12.