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Jed Emerson: What Impact Investing Has to Offer in Today’s Rocky Economy

   /   Nov 30th, 2011Interviews

Jed Emerson and Antony Bugg-Levine have co-authored a new book titled Impact Investing: Transforming How We Make Money While Making A Difference. Emerson has worked at Harvard and Stanford, focusing on value creation, social enterprises, and his specialty, blended value.  Bugg-Levine, on the other hand, stems from South Africa and has led TechnoServe’s operations in Kenya; most recently, he was at Rockefeller Foundation where he helped launched an initiative on impact investing (“Harnessing the Power of Impact Investing”). Below is Dowser’s conversation with Emerson on impact investing in today’s economic climate.

Dowser: Since traditional investing in recent times has led to financial woes, how would you distinguish impact investing from these traditional methods?  What can it offer us at this point when our economies are weak and volatile?
Emerson: It’s  important to understand that while the financial markets have gone sideways, not all investing practices the same.  Impact investing actually had a good deal in common with fundamental, bottom-up investing.  But it’s not the same as short-term trading, or “black box” approaches to investing.  In fact, because of the economic tumult, we’ve seen an increased emphasis on governance and transparency, which sustainable investor (or impact investors focused on public equities) have been promoting for some time.

Also, impact investing is often deep, long-term investing which can have less volatility and more consistent returns compared to mainstream investing approaches.  So, the currents markets have actually brought more attention to impact investing as an alternative option.

Is impact investing solely for the private sector or can the public sector help as well?  If yes, how so?
Yes, actually the public sector plays a critical role in creating a supportive web of regulatory and legal frameworks to assist in private sector funds moving to capture the impact opportunity.  Also, by partnering with private sector investors, public sector administrators can leverage greater performance off their precious public dollars—which will become even more precious in coming years as a result of deficit reduction efforts and cut backs.

In addition to participating in innovations on the capital front, the public sector has a critical role to play in advancing new organizational forms which allow for hybrid entities capable of pursuing profit with purpose.

And finally, advancing policies which encourage greater transparency and accountability on the part of all impact actors will be critical.  As more step forward to claim the “impact” mantel there will be a need for regulation that supports the creation of standards and independent analysis of performance claimed by private sector actors.

You’ve been working in this space for over two decades now, looking ahead what excites  – is it social enterprise, collaborative entrepreneurship, impact investing, all of the above or something else?
What excites me most is the number of conversations that are rising up in between the silos—discussions that focus less on social enterprises or impact investing per se than they do on innovative management practices or capital opportunities. Looking ahead, many of the tenets of impact investing will increasingly move to the mainstream and be viewed simply as the sound investing practices they are. But for this to happen there are a number of areas (law and regulation, capital formation approaches, metrics, leadership and others that we talk about in the book) which will have to be addressed.

What’s been one of the most inventive examples that you’ve encountered for impact investing.
There have been a number of truly inventive approaches to impact investing, ranging from the work of community development venture capital actors to peer based entrepreneurship funding efforts.

But I would have to say the most intriguing is the possibilities represented by the social impact bond.  Many of us have written about how advances in metrics and SROI analysis would at some point allow us to monetize cost savings and, of course, Arthur Woods outlined some core ideas for notes that could be structured for impact some time ago, but the folks at Social Finance-UK really linked the dots when they introduced the concept of the Social Impact Bond.

By combining the advances in metrics and performance with the need for innovative public sector funding strategies and the interest of private sector investors to structure funds for impact, the SIB really leverages across the silos in a really unique manner.  Now, the one danger of course is that the basic concept has taken off so well that people may be in danger of promoting an instrument that still needs time to prove itself.  However, as long as participants understand the risks and possibilities, this could be a major introduction for impact innovation, along the lines of micro-finance bond offerings which were so critical in assisting the micro-finance industry to scale its work.

What do we have to do to take impact investing from being a niche practice to a mainstream movement?
Well, of course, the second half of our book addresses this question at some length.

I suppose the key consideration here is that we need to remember that impact investing is by no means a “sure thing” that will grow and flourish.  There are very real forces supporting the traditional, bifurcated approach to value creation and investing.  These forces will not simply pack up and go home, so we need to understand that there will be some real challenges to come as we not only introduce new thinking and practices but as both those things come up against existing practices, systems and thinking which will seek to defend themselves from these new ideas.

I suppose we also just have to get out there and do more of it!  We need more capital investors willing to step forward and participate in impact investing—investors who in some cases must be willing to simply say to their advisers and current fund managers, “This is the direction we’re heading and if you can’t get me there, I’ll find folks who can” and then be willing to allocate into funds and products that may not initially “look like” what they have traditionally invested in.

The good thing here is that in point of fact, many of the strategies impact investors execute are simply expansions or new applications of approaches that have been with us for years—they are simply being applied in new markets and with new practices.  So there is actually more expertise and knowledge in how to execute than many mainstream investors may initially understand.

What kind of reception do you get from big corporations when you propose these ideas to them?  Are they receptive or still hesitant?
What’s been interesting to observe is the degree to which these ideas have been greeted with a level of caution—but an openness to discussion and experimentation.

If one considers what appears to be the generally positive response of many companies to the ideas of Shared Value advanced by Michael Porter and Mark Kramer, or to the potential of Social Businesses promoted by Mohammad Yunus, one sees that these ideas have actually been promoted for many years before those particular terms were introduced.  But the fact they are being promoted by Porter/Kramer and Yunus gives them a level of increased credibility that others speaking to these identical audiences haven’t been able to command over those same years—and that is great!  Seeing the growing traction of fundamental concepts of Blended Value, Impact Investing and new visions for companies being able to pursue profit with purpose is what it is all about.

The reality that new messengers are getting traction with core ideas we have all promoted over the past decade or more is what change is all about, so getting into the board room to have these discussions and advance new practices is key to our collective success.

8 Responses

  1. Paul Herman says:

    Appreciate Jed and Antony’s leadership on impact investing. We find that leading impact investors:
    1. Integrate impact metrics into their Investment Policy Statement
    2. Measure every investment on these metrics, across all asset classes
    3. Use impact as criteria for due diligence
    4. Review quarterly impact, risk, return and liquidity of their portfolio, and get their adviser engaged
    Join the world of impact investing

    3. Use impact criteria in due diligence to evaluate new investments
    4. Review impact, risk, return and liquidity in every quarterly cycle w or

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