Published on the Financial Times website, 1 May 2012
Sir, It is a shame that Alexander Friedman and Patty Stonesifer (“A chance for finance to start a revolution in giving”, April 26) chose to write an article based on general assertions rather than in terms more helpful to the investor community.
“Impact investing” suffers an identity crisis. No one is able to offer a generally accepted definition of what qualifies and far less offer a methodology for “measuring impact”, which allows investors to compare or evaluate investments. All manner of metrics are being touted but merely add to the transaction costs of such activities without giving investors additional comfort.
Some points specific to the article are worth making. First, there is evidence to show that investors are unwilling to pay for advice on different philanthropic activities. Intermediaries that have tried to offer these services have not succeeded in building a business.
Similarly, if foundations have “proven programmes that lack full funding” why should that funding burden go immediately to commercial asset managers and hence the general public. In the first instance why don’t foundations allocate some of the 95 per cent that they don’t give away towards such programmes or impact investments broadly? According to the authors themselves, if US foundations allocated 50 per cent of the 95 per cent, that alone could provide in excess of $300bn.
It is fanciful to assume that investment banks will play the role of intermediary in creating more impact assets for impact investors as the authors suggest. Such activities seem to require the intermediaries to accept poor financial returns. So even if they are ever undertaken (which is debatable) they will never be scaled up. The authors themselves imply a pro bono approach which is not likely to attract the best and the brightest over the long term. They will always remain a cute sideshow.
Again there is no evidence such intermediation services are valued by the market, even by the foundations or other non-governmental organisations that should be most interested in catalysing the creation of such assets. There has been talk of incubating “impact investment banks”, but it has proven virtually impossible for such entities to attract funding to help them set up. Indeed foundations themselves have been reluctant to offer any financial help. Where they do use such services they consistently push intermediaries to accept below market fees. That is not a sustainable business model.
It is irresponsible of the authors to make statements such as “impact investing … is relatively uncorrelated to the broader market” implying some protection of value. This fails any test of scrutiny. One only needs to look at how various climate change sectors fared recently or indeed how SKS Microfinance has fared since its initial public offering.
Impact investing is an interesting idea. But to move beyond being an intellectual curiosity and a subject for conferences it needs the application of financial rigour. That this concept is being promoted largely with a philanthropic mindset may not be helpful. If impact investing is just philanthropy then let’s call it that.