Tapestries-10 | Take that for data
The next piece in the evolution of ‘impact investing.’
Photo by Cesar Carlevarino Aragon
The way we think about financial markets has been driven by a view first proposed in the 1970s, that the ‘social responsibility of business is to increase its profits.’ Shareholder primacy ensured that when business considered its stakeholders, it placed financial returns to its shareholders at the top of its priority list. Within this construct, investors developed tools and incentives to measure and reward those responsible for delivering shareholder returns.
Thankfully, we are beginning to course-correct, and acknowledge that shareholders are but one group of stakeholders that business touches. If we wish to preserve our planet in any true sense, we have to ensure that other stakeholders — including the environment and communities in which we do business — are adequately addressed in our thinking.
Importantly, we also need to ensure that investors are equipped with the right tools to effectively consider impact.
Impact is driving change in financial markets
Change requires a movement, and in this case, interest in impact investing has been the catalyst driving change in financial markets. Advisors, asset managers and entrepreneurs acknowledge this large shift and have responded to investor demand by creating an ‘impact’ asset class. These shifts are necessary and important steps, but themselves are insufficient to drive lasting, truly impactful change.
The interface between investing and positive environmental and social outcomes is complex. Aligning investment returns with these positive outcomes is a near impossible task without the right tools. Thankfully, Boundless is building tools to enable investors to make investment decisions on the basis of real and relevant data.
Assets — across industries and within different asset classes — are usually priced in reference to tried-and-tested metrics, including P/E ratio, price-to-sales, return on equity or free cash flow (to name a few). The data to support these calculations is readily available and relatively straightforward to interpret. In aggregate, they allow us to compare different investments and improve decision-making. The impact investing industry is desperate for similar tools.
Good data is the cornerstone of good investing
As a family office investor, we have diligenced multiple ‘impact’ opportunities where the desire to be an impact-driven enterprise confuses the business’ value proposition. Impact does not need to be at the expense of profit or viability; arming entrepreneurs and investors with tools to quantitatively consider impact therefore removes uncertainty for all parties.
I have held the view for some time that impact investing should not be considered a standalone thematic. Rather, it should be considered a diligence item when considering all investments. Financials, complete review of quality of earnings; occupational health and safety, conduct site visit; impact, undertake quantitative analysis.
Only once investors begin thinking about impact in this manner, will ‘impact’ begin to have real… impact. Compiling and interpreting accurate data is the starting point. Asset managers purport (with somewhat decent intentions) to create products aimed at promoting ESG goals. However, they base these assessments on data that’s incomplete and of questionable relevance. The outcome is that many ESG products are simply common index funds with an impact-centric title. The composition of these funds lends credence to this view. Unfortunately, ‘impact’ has become an opportunity to sell more product.
Note: This is something I’ve written about in more detail here.
We know what the future of investing looks like; now we need to build it
Public markets and institutional investors can be short-term in their thinking for reasons beyond the scope of this piece. As a family office investor, we have the benefit of operating with greater duration and the ability to invest in a truly long-term manner. To do so with confidence, we need better data.
The impact investing ecosystem remains early in its evolution. The level of interest from private, public and institutional investors has broken out; there’s no turning back. As we invest ever-increasing amounts of capital and effort in pursuit of impact-driven outcomes, we must ensure that the outcomes match our intent. Good data is required as a cornerstone of this pursuit. Thankfully, Boundless has begun the journey to make us look better as investors and as global citizens.