5.3 Roadmap Step 3 – Organization Strategy Pillar
Pursuing an impact investing strategy can require varying degrees of organizational change depending on impact investing stage. For example, an organization can evaluate impact investing strategies and organizational models with a relatively temporary resource commitment using existing personnel. Similarly, a set of one-off impact investments can likely be piloted without large structural changes to the organization. However, significant and persistent change within organizations requires careful management of a number of factors. Even in the earlier stages of impact investing engagement, an organization should consider certain strategies and tactics to maximize the chance of future successes and organizational buy-in. While there is a substantial field of academic study and literature on the topic of organizational change, the aim of this report is to provide concise, pragmatic tactics. As such, we have outlined four strategic building blocks of organizational strategy for investors to consider: structure, culture, talent and technology.
Organization Strategy – Structure
An organizational structure that supports impact investing should reflect the organization’s commitment to and its targeted stage of impact investing. For example, in the evaluation and piloting stages, it may be enough to temporarily allocate investment professionals’ time to impact investing activities. However, once an organization is committed to impact investing, a dedicated and formalized structure of impact investing practitioners will likely be necessary.
➊ Spotlight – Zurich Insurance Group
- Figure 13 represents an approach taken by an asset owner (Zurich Insurance Group) in which a centralized specialist team reports directly to the Chief Investment Officer and liaises with asset class experts as well as “champions” within existing teams. A benefit of this model is that the champions are already integrated parts of existing teams and therefore already have rapport when offering new practices. Additionally, they have linguistic and technical credibility given their core financial skill-set of investment analysis and portfolio management. In other words, successful champions have as their “first language” that of the mainstream investor, and they acquire new expertise through exposure to sustainable/responsible and impact investing topics. Developing champions who can effectively can speak both languages takes time and patience, but ultimately they will be well positioned to educate the rest of their teams and rapidly disperse these ideas and approaches. This approach was complemented by an alignment of individual objectives with responsible investment targets for both the champions and the rest of the investment management organization.
➋ Spotlight – Morgan Stanley
- Figure 14 represents an approach taken by a financial services provider, Morgan Stanley. Given that many of the financial service provider organizations are large global institutions with a broad array of business lines, it follows that there are a number of different ways for these institutions to engage. Morgan Stanley’s approach is a centralized dedicated team that facilitates activities related to impact investing across business lines and with external parties and stakeholders. The team is empowered by a mandate from senior leadership to whom they directly report.
Organization Strategy – Culture
An organization’s culture is driven by values, norms and activities at both the level of the organization and the level of the individual employee. When managing a cultural shift, it’s important to consider drivers of change at both of these levels. Accordingly, maximising an impact investing initiative’s chance of success requires support from not only the organization but also individual employees. For example, it is not enough for leaders to declare that impact investing is a priority and that there will be an organizational unit spearheading an impact investing initiative. Rather, the impact investing vision should be well-defined and well-communicated, there need to be quick and visible wins that show momentum and help build a long-term case and progress must be realized over time.
Two themes commonly emerge among mainstream investors regarding the cultural changes that need to occur for impact investing to take hold. The first theme is that organizational values need to shift and be more focused on impact. The second theme is that individual perceptions about impact investing need to change. Some mainstream investors might recognize that within their organizations, inaccurate beliefs are held about the term “impact investing” – that it implies philanthropic activities and below-market returns. Clearly, as this report and others have discussed, there is a subset of impact investing that fits that description but we can also find numerous impact investments which are compelling on financial merits alone. Overcoming this bias will require new information to be presented. Such information may come in the form of the aforementioned industry reports or, more likely to change minds, in the form of the organization’s findings after evaluating or piloting impact investing approaches.
➊ Spotlight – Morgan Stanley and Zurich Insurance Group
- “The world’s population in 1950 was 2.5 billion. Today it is 7 billion. By the middle of this century it is projected to be more than 9 billion. This dramatically more populous world will, we believe, require tens of trillions of dollars of investment to ensure secure and lasting supplies of food, water, energy and shelter for everyone—not to mention vital services like healthcare, transport and education. Failure to meet these challenges may threaten global prosperity and force painful trade-offs between economic growth, human development, public health and ecological security. For us at Morgan Stanley, it is abundantly clear that the solutions to these challenges can only achieve the required scale if they can attract a critical mass of private capital. To this end, we’ve established the Morgan Stanley Institute for Sustainable Investing to lead work across our firm, with our clients and with academic institutions to help mobilize capital to sustainable enterprises, via global markets and the investors who drive them.” – James P. Gorman, Chairman and CEO of Morgan Stanley.
- “We aim to create sustainable value for our customers, our people, our shareholders and our communities. We make a contribution to society through our core business of insurance, but we want to go further and that is why corporate responsibility is a key ingredient of our business strategy.” – Martin Senn, CEO of Zurich Insurance Group.
➋ Spotlight – Huntington Capital
- Huntington Capital is a mezzanine fund providing debt and equity financing to established, small and medium sized companies in the Southwestern United States. They produce an annual “Impact Report” which includes such details as the number of new jobs created by portfolio companies, the total number of workers employed, as well as income and demographic characteristics of portfolio company employees. In addition, Huntington provides case studies on the impact created through specific portfolio companies.90 91
Organization Strategy – Talent
Impact investing requires skill sets and knowledge that traditional asset/fund managers and client-facing investment professionals may not currently possess. On the asset/fund manager side, such skills include the performance of impact due diligence and the ongoing monitoring of impact. And client-facing investment professionals need to be able to accurately represent the impact characteristics of investments – a new language for some. Organizations can leverage external resources, including impact investing conferences and events, to help employees learn these new skills. Additionally, they can recruit externally from a large and growing pool of interested experienced professionals and students.
➊ Spotlight – Columbia Business School
- Columbia Business School offers an impact investing course that focuses on 1) equity, debt and alternative investment structuring for early- through late-stage social ventures; 2) assessment of impact and financial value for companies and investment portfolios; 3) legal and governance strategies to preserve mission-focus throughout organizational scale; and 4) role of investment funds and philanthropy in building the impact investing marketplace.92
➋ Spotlight – CFA Institute
- The CFA institute hosted four impact investing events in 2013. A panel discussion at one of the events covered “the aspects of aligning a portfolio with an institution’s mission across all asset classes, the state of the impact investing industry, the investment process, how to conform to fiduciary responsibilities and various impact investing opportunities.”93
➌ Spotlight – Morgan Stanley Sustainable Investing Challenge
- The Morgan Stanley Sustainable Investing Challenge94 is a partnership between The Morgan Stanley Institute for Sustainable Investing, the Kellogg School of Management at Northwestern University and INSEAD. MBA contestants must propose and defend a strategy that uses finance and investment tools to address an environmental or societal challenge. Teams get matched with mentors who are experienced financial professionals and finalist teams receive priority consideration for impact investing internships at select partner organizations.
➍ Spotlight – Aureos Capital’s Africa Health Fund
- The Africa Health Fund has total commitments of US$ 105 million and invests across Africa in healthcare enterprises serving populations at the base of the socio-economic pyramid (BoP). It is one of 17 funds managed by Aureos Capital, a US $ 1.3 billion specialist private equity firm that focuses on providing capital to small- and medium-sized businesses in emerging markets. The fund integrates measures of impact into its compensation structure. Specifically, the fund sets development targets based on the percentage of BoP clients served by portfolio companies. For example, one such target might be that 50% of people served have an average annual household income of less than $3,000 (adjusted to equalize differences in the purchasing power of local currencies). A General Partner’s base carry is then dependent on achieving expected a financial hurdle but can be adjusted upwards based on the achievement of one or more of the fund’s impact targets.95
Organization Strategy – Technology
As is the case with many business and investing activities, a growing universe of specialized technology tools has sprung up to support impact investing. Such tools include web-based analytics engines and platforms which allow collaboration and house details on investable deals. Additionally, some organizations such as UBS are internally developing tools to accommodate new client demand for sustainable and responsible investing.
➊ Spotlight – UBS Sustainability Health Check
- UBS developed a tool that allows its wealth management clients to identify discrepancies between their sustainability preferences and the composition of their portfolios.96 While not specific to impact investing, this is an example of a wealth management tool that provides clarity on client preferences and that can start client conversations about the non-financial impact of investments.
➋ Resource List – Technology to Support Impact Investing
- B Analytics: Web-based tool offered by B Lab which allows users to research 1,400+ companies and funds, access proprietary impact investing market trend reports, utilize tools to collect impact data on companies/funds and benchmark impact against a global database of private companies.97
- Intellecap PRISM (Portfolio Risk, Impact and Sustainability Measurement): Web-based impact fund performance measurement framework capturing dimensions of impact (e.g. fund manager’s contribution, investee firm’s output and local investment context).98
- Mission Markets: A financial technology firm that helps institutional, advised and self-directed investors to make impact investments. The platform supports a range of financial products, including direct private placements, impact funds and structured debt securities. It also supports a broad repository of articles, research, data, blogs, forums and media that provide information about impact investing.99
- Vera Solutions: Salesforce.com-based service provider that will set up a data system to track and maintain social impact data.100
- Maximpact: A funding and collaboration platform that links funders with sustainable profit and non-profit initiatives and projects seeking investment and other types of collaboration. The platform covers projects on sustainable development, clean technologies and green investment.101