When my former colleagues at the environment, social and governance (ESG) research pioneer, KLD Research & Analytics, launched the bellwether Domini Social Index in 1990, one purpose was to measure what socially responsible investing was going to cost an investor in terms of financial returns. The index, along with numerous academic studies, proved that ESG factor integration does not have to negatively impact financial performance. The evidence drove client demand and product proliferation across every asset class, sector, geography, and investment strategy. During this time, I led the effort to catalyze the creation of Northern Trust’s ESG fund offerings and witnessed nearly every other major asset manager roll out ESG strategies. Today, over 20% of professionally managed assets in the U.S. incorporates ESG factors in investment decision-making.
Impact investing, which has an explicit intention of generating a measurable social and financial return, is going through a similar transformation right now. Early evidence suggests the same conclusion: that all else being equal, impact investors do not give up returns. While impact investing can apply to a wide range of asset classes and investment strategies, its most common product offering (by number of products) is venture capital funds. As it gains traction among all investor types, the need for impact investment products across every asset class and strategy will be essential to meeting the growing demand.
My vantage point comes from the roles I have played as a family office Chief Investment Officer and personal impact investor. Having managed a multi-asset class portfolio across global private and public markets, I know that a strong bottom-up investment thesis is not enough to make an investment decision. Sophisticated investors also consider the overall needs of their portfolio in terms of risk, liquidity, size, asset allocation weights, and other top-down factors.
Through an exercise I went through to see if impact investing could fit within my portfolio, it became obvious that there are missing pieces of the market among the available and high quality impact investment products. My conviction that investments in mission-oriented companies can help solve our world’s most pressing challenges, and that philanthropy and government alone aren’t enough, led to a personal decision to use my experience and skill set to be part of the solution in closing these gaps.
At the same time, Impact Engine has always been focused on filling gaps in the market. This is why we began as an accelerator in 2012, as no such financial and human capital support for social entrepreneurs existed in the Midwest. As we saw another gap in the need for interested impact investors to invest through a professionally managed vehicle, we shifted to deploying capital through our first venture capital fund in 2015. My experience as an investor in Impact Engine’s funds and the companies emerging from its accelerator gave me tremendous respect for the organization’s leadership role and the credibility of the team. It was a natural match to team up to continue catalyzing the impact investing market.
Here are some of the main missing pieces of the impact investing marketplace that I see right now:
- Private equity and credit funds focused on cash flowing companies
- Deep impact strategies accessible to retail investors
- Scalable vehicles that can absorb institutional investor allocations without sacrificing impact
- Qualified advice from individuals with both investment and impact experience
- Concentrated public markets funds focused on shareholder engagement
- Niche impact strategies targeting the most challenging social issues
- Customized solutions providers for investors with specific impact goals
As Impact Engine’s new Chief Investment Officer, I’m exploring each of these areas to determine how to advance Impact Engine’s mission to engage more investors, entrepreneurs, and advisors in a market where financial returns are linked to positive social impacts. More to come soon!
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