Finally, socially responsible investors can measure their impact
A new social-impact rating system promises to tell socially responsible investors where their money can best be used. The mix of philanthropy and finance is called 'impact investing.'
On the sloping shores of Italy’s Lake Como, at a meeting focused on bankrolling businesses that serve the greater good, one money manager licked his finger and waved it overhead in exasperation.
He was sick, he said, of basing investment decisions on the way the wind blows, a conference organizer recalls. Socially responsible investors needed a way to measure “social returns” with the same rigor used to track profit and loss.
Four years and a few dozen attempts later, that lakeside wish may come true with the debut of a social-impact grading system, launched this week at the Clinton Global Initiative in New York. The Global Impact Investing Rating System, or GIIRS, tracks companies’ social and environmental performance in an accessible shorthand, aiming to answer a core question sidelining many well-meaning investors: How do you know where your money can be best used?
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That consumer-friendly clarity is a milestone, potentially transforming a fringe form of philanthropy into a structured avenue for large and small sums of cash.
“We’re trying to show that you can actually do good and do well,” said Álvaro Rodríguez, head of IGNIA in Monterrey, Mexico, one of 25 social investment funds that completed a recent GIIRS pilot. “This rating system is putting your feet to the fire: You said you’re trying to have a positive impact – are you meeting that promise or not?”
The notion that investors can benefit from financing socially oriented businesses – a mix of philanthropy and finance known as "impact investing" – has evolved since the 1950s, when public- and private-sector groups began investing in emerging-market enterprises to fight poverty. Today, it’s an established offshoot of “socially-responsible investing” and includes 300-plus social-venture funds, according to a GIIRS team estimate. The field is expected to grow at least 10-fold by 2020, drawing more than $400 billion in investments to five sectors alone (housing, water, health, education, and financial services), with potential for at least $183 billion in profits, according to J.P. Morgan.
Much of that capital will come from average investors, including through pension funds and private banks preparing products to let clients allocate even modest amounts.
Still, most mainstream investors and financial advisers either haven’t heard of impact investing or doubt it produces both financial and social returns. That perception persists largely because it’s so hard to prove otherwise: Without clear standards to measure social and environmental performance, investors have little but guesses and gut reactions to assess results.