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?
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.
“We were getting calls from people saying, ‘Look, I want to make a difference and I’m dissatisfied with my only options being to invest my wealth or to give it away,’ ” says Margot Brandenburg, an associate director at the Rockefeller Foundation, which has made developing the impact-investing industry a top initiative. "People are trying to align their values and their money.”
In two key meetings at Rockefeller’s Lake Como retreat in 2007 and 2008, representatives of foundations, family offices, and financial institutions including J.P. Morgan, Prudential, and TIAA-CREF laid the groundwork for a hybrid approach. One of their most urgent calls was for the creation of social-impact metrics – both a common language to uniformly define and track impact, and a user-friendly shorthand to compare subsets of those measurements.
The Global Impact Investing Network is now developing that language; while Pennsylvania-based B Lab repurposed a social-impact certification it had created for U.S. companies into GIIRS.
“We probably didn’t spend a lot of time thinking about it before we said, ‘Let’s give it a shot!’” B Lab cofounder Andrew Kassoy recalls. Two years later, his team had raised $6 million and drawn input from hundreds of experts and investors; last spring, it tested GIIRS on 200 companies at 25 funds on five continents, revising its central questionnaire. Deloitte verified responses in a third-party audit that’s now part of every rating.
Investors, big or small, will pay a tiered fee to access those reports, simplifying research and investment decisions. Companies and funds pay between $1,250 and $15,000 to be rated, depending on their size; and expect results to draw investors or identify areas for improvement.
It's not clear, though, whether many social businesses can act on all that feedback without help, says Patricia Devaney, director of impact at Root Capital in Cambridge, Mass., another fund in GIIRS’ pilot. “The question is: If they’ve identified weaknesses, what’s the path to resolving them?”
What’s more, it may not always be practical to seek a perfect score. Most of the elements GIIRS grades are important for all businesses – but others aren’t, and seeking to ace all of them for a rating could be counterproductive. ”We want to make sure that the tail doesn’t wag the dog,” IGNIA’s Mr. Rodríguez says.
That caution frames a top challenge in making GIIRS applicable across diverse regions, sectors and business phases: It has to be broad enough to be relevant, yet specific enough to have meaning. To strike that balance, an independent advisory board spent months debating which measurements to include and how to weight them. B Lab ultimately created separate developed- and developing-world assessments and is exploring industry-specific surveys to supplement general ratings.
Most see GIIRS as one piece of the puzzle, an investor-facing tool in an evolving arsenal of social-impact metrics. If treated as a complement rather than as a substitute for due diligence, it could be key to making impact investing broadly accessible.
“We’re at a moment where, all of a sudden, there’s a combination of real interest and tools to execute; where we’re going from intention to action,” Mr. Kassoy says. “Investors can see results from the data and they’re like, ‘Oh, I get it. Now we can start.’ ”