Over two weeks ago, I posted a poll asking whether impact investing should be considered an “asset class”. The fact that the results currently come in at 60/40 (after many votes) in favor of NO asset class belies the considerable debate that has surrounded this topic both on this blog and other online forums. I am still a bit surprised about how many people have weighed in on a question that would appear to be mostly a technicality… but is it really just that?
Without being able to do justice to the many, many arguments constructed in favor and against the “asset class” question, I would like to take a moment to restate my understanding of what people have said on this topic. Then, in a broader sense, I hope to convert part of this controversy into something of meaning and, in typical fashion for this blog, will attempt to identify what really is at stake at the end of the day in dealing with this question.
Let’s start with the believers of the asset-class view. Main arguments for people who vote in FAVOR of impact investing to be an asset class seem to revolve around some of the following points:
- Treatment as an asset class creates a “beachhead” for the emerging discipline of measuring financial and social returns in investments in that it is supposed to create official respect for this type of thinking/investing among the big, professional investor community
- Only when those large investors view impact investing as a distinct form of asset will they be impelled to expend money and resources to create necessary standardization of infrastructure, generally acceptable impact measurement tools (similar to accounting rules) and other systems that are required for impact investing to enter the main stream of global investing
- The assumption is also that if we require specialists to properly interpret and analyze impact investments, they should merit their own asset class designation for whatever it is they are doing
- Hence, without an asset class designation by the investor community, fear exists that impact investing may fail to open the floodgates of mainstream money and be potentially relegated into some vague, marginal, and perhaps esoteric “strategy” that is backed up more by opinions than rigorous methodologies
Paraphrasing some of the pro-asset class folks, it is fine to recognize the transformational paradigm that “impact” or “triple bottom line” investing implies. But from a pragmatic standpoint, without placing further rigor around the “squishy” elements of impact measurement and return calculations, we may be committing the error of “seeking perfection instead of being content with good enough” in the short-term. And the problem with this is that there may be no long-term prospect for this way of investing going forward to spread massively. Given this risk, if it happens that financial powerhouses like JP Morgan would like to relegate impact investing into an “asset class”, why not indulge them even if we have conceptual and ideological issues with this? The argument here seems to conclude in that we should not care about whether or not this categorization of impact investing into an asset class is intellectually or practically limiting, as long as the people who do believe this have the means and commitment to, well, invest in impact investing, for lack of a better word.
Now to the opponents of this view. These people seem to deplore the above idea that impact investing should be an asset class on various grounds, which includes the following ideas:
- Impact investing is a theme, a philosophy, and an approach, instead of a distinct asset class
- Just like “emerging markets” could be something that can be pursued with a variety of asset classes (debt, equity, etc.), impact investing can manifest itself across a plethora of instruments and capital market tools, so it makes no sense to force a definition into one all-encompassing asset class
- Financial players like JP Morgan may be trying to promote the asset class view in order to easier streamline this theme into a product mindset, along which it can build its sales force and the storyline needed to sell more to clients excited about this hot topic
- One of impact investing’s most important promises is the transformation of our perception on what it means to invest (and who is involved in this process); while the “asset class” camp seems to presuppose that because of the traditional notion of the word “investing”, this “thing” belongs to those with financial backgrounds, the “anti-asset class” camp seeks to promote a broader view of investing as not just a matter of transferring financial capital in a certain way and to certain “outlets”, but to view a larger set of stakeholders (customers, communities, policy makers, activists, etc.) as investors who seek to create value above what may not be easily (or at all) measured in monetary terms
I am sure I left out many other important points raised on both sides, but hope these ideas are enough to reasonably well describe this proverbial wedge that was driven into the impact investing-enthusiastic community by this question.
Now then, what does it all mean?
For one, I suspect that point 4) of the anti-asset class camp seems to be the most important measure of impact investing to get right if it wants to make its mark as the historical turning point its vocal advocates have touted it to be thus far. The most important idea behind what we coin as “impact investing”, to me, seems to be the challenge to what it means to be “investing” in the first place. Traditional investing is about putting in money in dollars today and getting more of the same dollars out tomorrow based on some arcane rules of “market valuation” that determine how much something is valued at. Impact investing, if I understand correctly, is not just about pouring in money one way and getting out more of it at the other side. It is the intention of creating socially and environmentally meaningful value in return for monetary currency placed, in addition to obtaining a monetary payout.
However, note that when we have a case where we generate a return consisting of 100% social and environmentally positive outcomes and a 0% in dollars, we have historically called this not investing, but philanthropy (or the practice of giving with “nothing” in return).
In a strange way, impact investing, if it is to succeed in a revolutionary way, ought to be about our change in mindset that a 0% monetary return “may” in fact be also considered an investment and NOT just philanthropy. In other words, perhaps one reason for the trouble and contemporary discontent we find ourselves in are the linguistic, legal and ideological distinctions we have drawn between the nature of philanthropy and investing as separate concepts. That, in return, may have been the result of a fateful historical decision made long time ago by our tribal elders to distinguish value from worth, with hard, precise money measuring the former and a vague collection of other things like love, compassion, communal responsibility and civic duty aspiring to measure the latter. Because our elders eventually managed to come up with a system to write down and calculate the former but not the latter, we find ourselves today with “the marketplace” the way it is, with both its mathematical elegance as well as, at times, its moral void.
Coming back to this debate, perhaps the central objection that not many have yet articulated is this: that conventional “investing”, despite economists’ claim that such market exchanges are completely objective and done in voluntary spirit, are in fact alienating us from who we are supposed to be (people in pursuit of not successful but worthy lives). This happens because (1) we judge the ultimate value of an asset or company by rules that dictate a strictly monetary figure and (2) that figure, although heavy in rationale how it came to exist, bears no meaning really as to the actual worth of the asset to the good life. By that logic, a company producing TVs valued at $50 per share is equivalent to a tobacco company valued at $50 per share, and my preference for investing my money in one but not the other is part belief systems but ostensibly, mostly cash-flow prediction rationale learned from magic books.
That brings me to the asset class debate.
In my opinion, after pondering the many comments over the past month on this topic, the weakness of the “asset class” camp stems from its followers’ presumption that fitting the square peg of “social/environmental impact” investing needs to occur according to the round holes, i.e., existing rules, of the conventional market place. Their argument precedes unflaunted somehow like this: “Impact investing is investing, no matter what. Investing means things have to be quantified in a systematic, rigorous way to make sense and for us to value them properly by the single currency of money. If impact investing wants to succeed, it needs acceptance by the existing powers of our financial markets, who hold the key to developing the right system for us to carry it into the main stream. And in order to get acceptance, it needs to be a robustly defined asset class or category in the lexicon of investment professionals worldwide.”
“Main stream”, meanwhile, perhaps refers to this mysterious time and place where people who invest for money suddenly want to invest for “socially impactful things” AND make great money while they’re at it. That way, they ideally can have their cake and eat it. Their presumably selfish motivations that fuel the trillion dollar financial markets can then direct a part of this wealth towards a “nobler” asset class – thus putting us all a step closer to solving the world’s many problems through the power and tools of investing.
It is my contention that these tools are perhaps not really all that powerful or appropriate for what we are trying to do. These tools were designed for us to find more sophisticated ways to monkey with a game of numbers (“investing”) devised for arithmetic pleasure to capture supposedly objective “value”. But because the assets under consideration now seem to contain other subjective elements many of us care more about (the creatures of “worth”), we struggle to validate such “philosophical assets” using conventional (read: insufficient) economic analysis methods. For instance, we ask ourselves questions like what the price of sympathy should be and then wrestle with how much people should pay for it in dollars.
This leads me to echo the sentiment of some in the community: whether or not we end up designating impact investing into some form of asset class is besides the point. In my opinion, the great challenge of our times is not whether we will define some nifty system to calculate and measure the social impact or relevance of our investments. It is not even the problem of scaling “the impact investing industry” by pouring more money into it. Instead, the great problem is recognizing that we in fact have no system at all capable of measuring the underlying meaning or worth that such socially responsible investments have for us… not as long as we forcibly try to fit such reasoning into our conventional economic models designed long ago for a very different, narrower purpose, arguably mostly relying on the currency of money in its toolkit.
It would seem that we have indulged this economic reasoning because we have been meaning to evade a much more important system of reasoning – one about values, instead of value.
One common challenge with the term “impact” investment is that it allows the (too easy) explanation that “well, every investment has some form of impact“. Deep down, most of us should know that this cannot be true with respect to those types of investments we are talking about. What we probably are talking about, without wanting to admit, is that we actually want positive impact. To qualify “positive”, we implicitly have to place normative judgment on the social good or worth of one investment over another because the “impact” or outcomes one firm seeks appeal more noble and worthwhile to us than that of another.
This could suggest that we may have to re-learn the ancient practice of deliberating what “The Good” means to us as different societies and individuals, and we need the courage to vote with our voices and dollars in favor of those organizations embodying our ideals of real progress. Whether – and how much – money we expect to make out of this is a less important question, in my opinion, than the sheer willingness to argue and defend our beliefs how things should be in a better world. Alas, I fear our capacity to engage in such deliberation about the good life in an open and honest way (i.e., without fear of being perceived as “moralizing”) has vastly diminished in both the public and private sphere – for reasons too numerous and complicated to get into right now.
For what it’s worth, because these judgments and alliances to different causes are deeply personal, it explains why for so long we have had a thriving community of philanthropists pursuing exactly that aim – to “invest” money to see social outcomes they wish on the world, while leaving their more objective, “asset maximizing” activities to day-jobs following the easier monkey game of numbers.
Perhaps what I am getting at is this: if we want impact investing to have its most transformative effect, we can probably not avoid questioning to what extent we should be putting philanthropy and investing in different boxes. This is a difficult question and it merits time to reflect. It may be that the answer is not to focus on how to “scale” socially oriented enterprises with standard economic analysis to yield desired monetary returns. Instead, the answer may lie with a change in what we expect a “return” to be and mean to us.
In the final analysis, in light of this and many other unresolved issues, those of us seeking to quickly compartmentalize, categorize and standardize measures of impact – such as by creation of a distinct asset class – may in reality rush into an exercise that is counterproductive to the very progress we deem to support (not least because contemporary debates, reports and presentations seem to be led predominantly by the rigorously market-indoctrinated finance and strategy consultant crowds).
By that token, I would personally not mind us being somewhat “marginalized” or taking longer to get into “the mainstream” if it means we can take the time to create a truly sensible system that helps us identify and appropriately honor things of worth, and not just of value.