Underperformance in ‘certain impact investment sets’ has fuelled LP hesitancy, says GEM’s Zeigler

Brandon Zeigler, an impact director at outsourced chief investment office Global Endowment Management, will be speaking at the Impact Investor Summit in New York at the end of October. In the run up the event, he gives us his take on clients’ appetite for impact, their top priorities and barriers they face when investing in impact.

How much appetite is there among endowments and foundations for impact?

Endowments and foundations seek varying degrees of support for impact investing, with around a quarter already implementing ESG policies or positive impact investments. Another quarter are actively seeking strategic advice and education to support their institutions to consider the role of impact in their investment process, and to respond to stakeholder interest and enquiries related to ESG, divestment and impact investing. While these institutions may not be actively pursuing impact investments, they are in the education process that often results in impact implementation.

What do these LPs look for in an impact manager?

LPs often seek assistance in identifying and investing in impactful ventures due to the abundance of disparate information in the market. They look for experienced partners in impact investing research to help evaluate these investments, as they may lack the internal structure for effective measurement and assessment of impact outcomes.

Global Endowment Management and its clients generally seek impact investments that meet three criteria. First is portfolio impact – investments that show measurable positive impacts on various stakeholders within the portfolio. Second is manager impact – investment managers actively working to achieve improved outcomes for stakeholders. Third is alignment of investment and impact outcomes – where the impact aligns with financial returns.

Do you see any barriers to these institutions allocating to impact funds?

Key barriers include marketplace confusion between ESG and genuine impact, hindering objective-driven investment choices. This confusion obscures measuring and monitoring real impact, making it hard for institutions to select impactful investments without compromising returns.

Historical data, while not indicative of inherent inferiority, displays past underperformance in certain impact investment sets, fuelling investor hesitancy. We do not believe this is because impact investments are inherently worse investments, but we do believe an impact programme must be implemented by a thoughtful, experienced and integrated impact investment team to meet the return and impact outcomes desired by institutional clients.

Lastly, portfolio integration poses a challenge, especially in constructing endowment-style portfolios due to narrowed investment options when integrating impact components, necessitating expertise to balance diversification and impact focus.

How do impact and philanthropy intersect?

This is the most exciting aspect of impact investing. Philanthropy can deliver so many positive outcomes, but it does not hold sufficient capital to meet the needs of certain global challenges, and it is not always the optimal instrument to deliver change. Impact investing complements philanthropy because it provides significantly more capital and a differentiated approach to solving our most pressing challenges.

In the US, around $65 billion in philanthropic capital went towards human services in 2021, according to Giving USA. This includes services such as hunger relief, homelessness and crisis assistance. Impact offers market-based solutions to support wealth creation and reduce the need for such services. For instance, outcomes-based healthcare companies can deliver more affordable, high-quality healthcare and reduce medical bills – the leading cause of US bankruptcies – while affordable housing projects can help reduce an estimated 7 million shortfall in affordable homes for renters on the lowest incomes.

Brandon Zeigler is an impact director at outsourced chief investment office Global Endowment Management. He will be speaking on Day 2 of the Impact Investor Summit: North America on a panel on integrity in the impact market. You can view the agenda here.