New Ratings to Peg Social Investing 'Return'

By Tom Stabile April 27, 2010

Socially oriented investing has yet to gain a wide audience largely due to the simple math of returns. Investments that are long on socially beneficial characteristics but trail in terms of financial performance have, to date, fallen short in attracting mainstream investor capital.

But a new organization aims to rattle that equation with a new variable. If it were possible to access credible and consistent data that quantifies the social good generated by companies, would investors consider that measurable non-financial benefit alongside financial performance when setting their portfolios? The answer many members in the Global Impact Investing Network (GIIN) are expecting is “yes.”

The organization has already lined up about two dozen members, including the Rockefeller Foundation, Citigroup, Deutsche Bank, JPMorgan, and the Bill & Melinda Gates Foundation. And last night, one of the core elements of the GIIN initiative – a new set of investment ratings measuring the positive social impact of companies or funds – got a pledge of $6.5 million in development funding from the U.S. Agency for International Development, Prudential Financial, Deloitte, and Rockefeller.

The backers aim to keep building momentum off of GIIN’s launch last fall. Its broad mission is to create a marketplace for investors who will accept “submarket” returns – in other words, sacrifice a few points of performance – if the difference essentially finances a measureable social good, says Melody Meyer, GIIN’s associate communications director. And there may be a large population of investors who would be open to some of the less traditional investments specifically oriented toward a public benefit – often called “impact investing” – if reliable data on their social results were readily available.

“That’s our core target group – the people who aren’t in [impact investing] yet because it’s not accessible,” Meyer says.

With that goal in mind, GIIN is fostering an effort to professionalize the process of collecting and comparing data about the socially beneficial aspects of investments.

The heart of the strategy is in four core tools – the Impact Reporting and Investment Standards (IRIS), a set of definitions for measuring social investing characteristics; Pulse, a tailored portfolio management tool; the “Data Aggregator” repository, which compiles industry-wide social investing data to support benchmarking and analysis; and, perhaps most influential, the Global Impact Investing Ratings System, which will grade investments by how much social good they generate. All four tools are in development and running in pilot form. The initiative was spurred by the impact investing community, a group of money managers and other organizations focused on getting capital to community enterprises on the front lines of combating poverty and underdevelopment. But its underlying framework could be used to judge the social merit of any kind of investment, and that’s particularly true for the ratings being built by B Lab, a GIIN partner.

“[The ratings system] is like Morningstar or Moody’s, but for social impact,” says Andrew Kassoy, co-founder of B Lab. “It rates both individual companies and private equity funds on their social and environmental impact.”

The end result should underpin a functioning market for social investing that attracts all kinds of investors, says Sarah Gelfand, director at GIIN for the IRIS initiative, which encompasses the “data aggregator” repository and the glossary of standards. “This absolutely is meant to help build a market for the for-profit investing world to participate,” she says. The intent is to deliver standards, auditing practices, and ratings agencies to make impact investing more accessible, she adds.

Meyer says making social impact data accessible includes helping investors to determine, for instance, how the social good from 115 seasonal jobs at a farm cooperative in South Africa ranks alongside a factory with 80 full-time jobs in South America, Meyer says. “You can begin to compare the data, apples to apples, across investments,” she says.

To date, such a data platform hasn’t existed, leaving impact investing primarily to dedicated participants. “The lack of infrastructure is a big gating factor keeping out professional managers and advisors,” says Brad Presner, who manages development of the Pulse tool being built by Acumen Fund, a GIIN partner.

Most current tools to track social investments have been tailored for specific investors, says Amy O’Brien, director of the global, community and social investment unit at TIAA-CREF. “I think, frankly, it’s difficult for some investors to use what’s currently on the market,” O’Brien says.

Advisors would certainly use the GIIN tools, says Michael Lent, partner at Veris Wealth Partners, a socially responsible investing specialist. “And yes, you’re going to see more interest from advisors who haven’t specialized in it,” he adds. While most market participants today are aware of the basic tenets of socially responsible investing, the GIIN initiative aims beyond SRI, which tends to focus on how investments avoid negative impacts or minimize social harm, Gelfand says. By contrast, the thrust of impact investing is to quantify proactive, positive results.

For instance, where a typical SRI portfolio might avoid “sin” stocks of companies with excessive carbon footprints, the impact investor might favor an enterprise that delivers a certain amount of potable water to a poor community.

The impact investing sector today has about $50 billion in assets, mostly from philanthropic or government funds, but the market may grow to $500 billion in the coming decade, partly from an infusion of private capital, according to a 2009 Monitor Institute report. Meyer says while the data initiative is central to GIIN’s strategy, the network is also organizing forums and reports to build awareness about impact investing.

A handful of money managers – often smaller nonprofits – dominate impact investing, though some larger organizations, such as TIAA-CREF, also have units to invest in areas like low-income housing projects or microfinance institutions. The investments often go to small- to medium-sized private enterprises in underdeveloped regions, and usually involve direct private equity-style placements.

“Today’s sources of funding are a drop in the bucket compared to the need out there,” says Mildred Callear, executive v.p. and COO of Small Enterprise Assistance Funds, a nonprofit private equity fund. “These small companies cannot access the financing they need locally. It’s a market with huge demands for capital but constrained supply, in some ways because [they can’t compete] on a pure financial-return basis.”

That’s where GIIN’s data initiative could even the playing field, by quantifying the social good that could offset the “negative premium” of financial returns from these enterprises – and potentially attract more capital from mainstream investors, Meyer says.

“If you can guarantee a baseline financial return of 5% or 6% or 7%, I think a lot of investors would be able to say ‘I gave away 3 basis points for [a social benefit],’” Acumen’s Presner says. FundFire is a copyrighted publication. FundFire has agreed to make available its content for the sole use of the employees of the subscriber company. Accordingly, it is a violation of the copyright law for anyone to duplicate the content of FundFire for the use of any person, other than the employees of the subscriber company.

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