Impact Investing, and What I Wish I Knew When I Started
Introduction to Systemic Challenges
I started my career as a teacher with Teach For America, hoping to replicate in my classroom a version of my grandfather’s rags to riches story, with education as the great equalizer for kids from underinvested communities. My former students would say I taught them well, but I learned more than I taught—about compounding, systemic challenges for people living in poverty, and the insufficient public programs that they often rely on to get by but that are never enough to get ahead. After seven years, I was disillusioned by the persistent gap in educational outcomes and the reality that, for some kids, no amount of talent or persistence was enough to overcome the obstacles.
Shifting my Approach
Around that time, I was approached by Global Endowment Management (GEM), a leading outsourced chief investment office (OCIO) providing institutional investment capabilities for endowments, foundations, and other long-term investors. They had an exciting—albeit unusual—opportunity. It was 2012, and while the concept of responsible investing was not new, the field of impact investing was just entering the mainstream. Big-name universities were at the onset of multi-year battles with students over divestment, but foundations were starting to blur the line between investment portfolios and impact objectives. The firm brought me on to help figure out how to enable our clients to invest for impact.
The learning curve was steep—it had to be; we were building a practice that didn’t previously exist. Today, as investors continue to seek ways to integrate their values into portfolios, I wanted to share four lessons I’ve learned over the past ten years that can hopefully help other families jump into the world of impact investing.
1. You can invest for positive impact without sacrificing returns.
By definition, impact investments are those made with the intention to generate positive, measurable social and environmental impact alongside financial return. Perhaps more importantly, impact investing can align with investing in companies that are positioned to outperform. Take for example our firm’s investment in a battery storage project—one of the largest in the world today—which feeds into the California energy grid. It stores energy from renewable sources during peak output and provides energy back to the grid during peak demand, reducing the need for carbon-intensive natural gas power. Impact investments present compelling opportunities because they meet tangible and critical current and future needs, such as reliable renewable energy, affordable housing, and effective and affordable healthcare. This presents an investment opportunity, not a concession.
2. ESG investing is not the same as impact investing.
ESG investing refers to considering environmental, social, and governance (ESG) factors as part of the investment decision-making process. Over time, ESG investing evolved into the process of assessing ESG factors that are financially material—and, in doing so, ignored environmental and social impacts that are not financially material. But we know investments can have negative environmental and social impacts that are not financially material. We see this in global supply chains, which do not always ensure safe and fair working conditions, yet provide products that are financially viable. We see negative impacts of gentrification on local communities, while real estate investments generate strong returns for investors.
For this reason, we utilize a stakeholder-centered model, that seeks to understand the impacts of our investments on five stakeholders—communities, planet, employees, supply chain workers, and customers. Sometimes these impacts are financially material and sometimes they are not; but it is possible to identify positive impact across stakeholders alongside financial returns. Positive impact alongside financial returns is the aim of impact investing, differing from ESG investing.
3. Impact investing complements philanthropy.
In some cases, philanthropy addresses negative outcomes rather than causes, simply because philanthropic capital isn’t the right tool to address the root causes of those outcomes. For example, food banks feed an estimated one in seven Americans, with Black individuals three times more likely to face food insecurity than white households. Supporting food banks is important—but it does not address the root cause of food insecurity.
Impact investing provides a unique opportunity to address the gaps in economic equality and wealth creation—the issues that often cause food insecurity in the first place. Although Black women are more likely than their white male peers to start businesses, they receive less than 1% of venture funding, and all Black entrepreneurs receive less than 2% of venture funding. Black business owners are denied loans nearly twice as often as white business owners. Access to capital and credit are critical to building Black-owned businesses, which are in turn critical to increasing wealth in Black communities. In fact, the net worth of Black business owners is 12 times higher than for non-business owners. Impact investors can invest directly in minority-led investment funds to increase the flow of capital to historically undercapitalized entrepreneurs (investors overwhelmingly invest in founders that look like them, so it’s unsurprising that the homogeneity among venture capital firms results in significantly more access to capital for white male founders than diverse founders). The business case for investing in diverse fund managers and entrepreneurs is clear: diverse-led funds and companies tend to outperform their non-diverse peers. When it comes to issues of equity and access, impact investing can provide an opportunity to utilize investment capital instead of or alongside philanthropic capital to address root causes.
4. There are teams that value impact and returns—work with them.
In my first few years working in impact investing, I observed an unsettling trend: investment firms, pressured by high-dollar clients to integrate values into portfolios, began launching ESG and sustainable investment practices with little accountability for environmental and social outcomes. Another equally unsettling trend: philanthropic organizations with expertise in environmental and social issues began launching investment practices intended to leverage financial markets for scalable outcomes. Both of these approaches are problematic because they create an imbalance in expertise and focus—and ultimately in outcomes. In my experience, there are vast differences in the values, knowledge, and experiences between individuals working at investment firms and those working in the social sector. Too often, these differences have led to a philosophical divide, placing purpose and profit at odds with one another. But despite these differences, these two industries can complement one another. I have the unique pleasure of working side-by-side with our firm’s head of Private Equity; we built our impact investing practice together, from the ground up, with the goal of integrating our values and views into our approach. We are not alone—many firms have developed teams with sophistication in both investing and impact outcomes. As you seek to incorporate impact investing into your portfolio, identify organizations that take both impact and investing seriously—it will likely result in better impact outcomes and better returns.
Meredith Heimburger is a partner and the head of impact at Global Endowment Management and a director at the Cynthia and George Mitchell Foundation.
This post is being provided for informational and educational purposes only and is not the basis for any contract to purchase or sell any security, or other instrument, or for Global Endowment Management, LP (“GEM”) to enter into or arrange any type of transaction as a consequence of any information contained herein. The views and opinions expressed in this post are those of the author and do not necessarily reflect those of GEM. Any content provided by the author is of their opinion and not intended to malign any organization, company, individual or anyone or anything. Opinions expressed herein were current as of the date of this presentation and are subject to change. Neither GEM nor any of its affiliates or employees makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this video, and any liability therefore is expressly disclaimed. Returns are not guaranteed.
The views and opinions expressed in individual blog posts are those of the author(s) and do not necessarily reflect the official policy or position of the National Center for Family Philanthropy.