“Anyone who will want to enter the field of finance or investment must be conversant in investing for impact. We believe this is the case, even if you are not yet convinced or don’t plan a career focused on this practice of investing.”
This is the proposition faculty members Shawn Cole and Vikram S. Gandhi made to the approximately 50 students in the inaugural “Investing for Impact” course launched this past semester in the MBA elective curriculum.
And the data supports it. An increasing share of assets globally are subject to non-traditional (environmental, social, and governance [“ESG”] and impact) criteria, including over 25% of all professionally managed assets worldwide (ca. $23 trillion). This approach is growing, and moving from niche into the mainstream dialogue. In 2018, Larry Fink, CEO of BlackRock, the world’s largest asset management firm, wrote in a public letter: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
This statement captures the increasingly broad-based sentiment that asset owners should include not just ESG, but also impact criteria in their investment process. Most large asset managers (e.g., Goldman Sachs, Bain Capital, TPG, BlackRock, State Street) are establishing sustainability, ESG, or impact investment practices, and developing products to meet the demands of capital owners, including pension funds, endowments, and family offices.
Through 20+ new cases covering public markets and private markets; start-ups and incumbents; market-returns and concessionary approaches, the Investing for Impact course provided an opportunity for students to critically examine the logical and market case for this wide range of models.
And the promises are seductive: better long-term risk management, “doing well by doing good,” even new sources of alpha. Skeptics in the class raised concerns that a focus on non-traditional criteria may distract from and reduce returns, or, on the other extreme, shift funding away from worthy philanthropic causes. Advocates in return pointed to examples from cases of leaders designing “win-win” strategies.
But what was most compelling was to hear the conversation move past an “either/or” debate and rather reflect a nuanced discussion on when, why, and for whom investing for impact may be a solution. Students closely examined the theoretical and practical challenges faced by practitioners, and where available, the supporting data. Questions tackled included: What does it mean in practice to incorporate non-traditional preferences and criteria? How do such activities affect risk and return? Do these new practices actually alter company behavior or create social value? How is and how should social value be defined and measured?
With evidence on many of these important questions accumulating, the intention was not to give students a map, but rather a compass to navigate this rapidly evolving field with the hope that this first generation of students will play a role in shaping this important trend.
Caitlin Reimers Brumme (MBA 2012) is the Program Director for the Impact Collaboratory. A research-led effort to understand and advance the practice of investing for impact through education, research and engagement with leading practitioners.