When I made the decision to join a large alternatives firm last year to help launch its impact investing platform, many of my friends and colleagues across the industry were caught off guard.
Having spent the last few years in academia, following a long career in impact investing that included time with a European family office and as CEO of Calvert Impact Capital, a pioneering nonprofit, the choice to join a global investment manager surprised a few. But my decision was simple and driven by the guiding principle that has shaped most of my career. I want to make a positive impact on people and our planet, and I saw an opportunity to do so.
“For impact investing to reach new heights, I believe it needs to reach more mature businesses”
The early days of impact investing were dominated by venture and early-growth equity deals, but for impact investing to reach new heights, I believe it needs to reach more mature businesses, and that’s where our focus is. We believe later-stage companies have the potential to create more impact as a function of their scale: they generally serve more customers, sell more goods and services, employ more people, and often hold leading positions in their respective markets. By taking an “impact-at-scale” approach, we believe we can generate lasting positive social and environmental change, and that investing in later-stage companies is the natural next step in achieving the maximum benefits of impact investing.
Over the past decade, there has been a paradigm shift around ESG. The historical view was that companies needed strong ESG programs to mitigate risk, and likewise most investors diligenced it through that lens. But as more data, measurement and transparency brought ESG to the forefront, it not only became table stakes for companies and investors, but also began to demonstrate how strong ESG can drive outperformance (paywall).
A similar realization is happening in impact, and investors are increasingly using this approach across asset classes. The world’s largest and most sophisticated investors are recognizing how impact strategies can help address the most pressing societal needs. And this realization comes at an important time. Societal needs are more pressing than ever as recovery from the global health crisis and curbing climate change require ambitious and audacious solutions.
To meet the growing demand for impact investments, we believe investors must broaden the pipeline of opportunities and deploy capital at a greater scale. To that end, later-stage companies are part of an expansive and underpenetrated new frontier.
“Later-stage companies are part of an expansive and underpenetrated new frontier”
Notwithstanding the benefits of investing in more mature businesses, doing so does not come without challenges. Historically, impact investors have been sceptical about investing in mature businesses due to their intrenched operations. For years, these companies have been committed to following certain processes and procedures and require immense capital and resources to effectively implement change. Despite their good intentions to place increased emphasis on corporate social responsibility and sustainability, companies with long track records can be resistant to adopting new impact requirements. It’s not exclusively a cultural challenge either, as these companies typically don’t have the technological infrastructure in place to properly measure impact data and metrics. In some cases, there is a will, but no clear way forward.
Fortunately, our industry has evolved. Reporting and data analysis have come a long way. Rather than creating customised, proprietary tools, investors are better served to take advantage of existing tools and frameworks that the industry has created (Operating Principles for Impact Management, Impact Management Project, B Lab, etc). While universal standardisation may never be practical, as a field we are still striving for harmonisation. Third-party resources have grown in sophistication and now complement one another, allowing investors to produce material, comparable metrics across portfolios.
Just as the tools and technologies have matured, so has human capital. More financial professionals – and increasingly women – are establishing careers in ESG and impact investing than ever before. And just as it’s important for any successful team to be comprised of professionals with diverse backgrounds and perspectives, in impact investing it’s crucial to have a team and advisors with both financial and impact experience. For the industry to continue moving forward, we believe impact teams require a well-rounded group of individuals that can provide first-hand knowledge and experience with the issues at hand to ensure the proper solutions are implemented to achieve maximum positive impact.
In its essence, impact investing is just like traditional investing with intentionality around impact objectives. The most recent annual report from the GIIN, a leading impact investor network, stated that roughly nine in 10 impact investors find that portfolios are either meeting or exceeding their financial performance expectations.
There’s much more work to be done and that begins with meeting institutional demand and generating positive, meaningful change.
Lisa Hall is impact chair at Apollo.