Impact Investing Done Right: How three families got their portfolios to profitably reflect their values.
Impact investing—the art of creating portfolios that earn market-rate returns while also seeking to advance social or environmental aims—is a mercurial child of the 21st century. Hard to pin down with precise definitions and interpreted in a variety of ways, impact investing is nonetheless a fast-growing force below the surface of our financial markets, effectively blurring the lines between philanthropy and investing.
Liesel Pritzker Simmons is a Hyatt Hotel heiress, a leader of the impact-investing movement, and a co-founder of the impact-investing family office Blue Haven Initiative, which she runs with her husband, Ian. Two years after winning a 2005 lawsuit against her family and extracting $500 million in inheritance, Pritzker Simmons and her husband were traveling in Rwanda and thinking about how their investments could have a more direct impact on the lives of impoverished Africans. After returning home, she ran their idea by her financial advisor, who sneered, saying, “How much money do you want to lose?”
The advisor was fired. Today, with the help of the Caprock Group’s Matthew Weatherley-White and impact consultant Jed Emerson, Blue Haven’s portfolio is 100% invested for impact, aiming to earn market-rate returns across asset classes. “This isn’t philanthropy,” the 31-year-old Pritzker Simmons insists. “The people I know who are thoughtful about impact investing are not crunchy tree-huggers. This is part of the way investing should be done.”
Pritzker Simmons is a kind of poster child for an entirely new generation of investors coming up the ranks and rattling conventionally minded private bankers. From 2007 to 2061, $59 trillion in assets will pass on to heirs, many of them as socially conscious and demanding as Pritzker Simmons. These folks want their investments to not just make money but also make a better world. An industry association, the Forum for Sustainable and Responsible Investment, or US SIF, using a very loose and broad definition of impact investing, claims it is already a $6.57 trillion business in the U.S., after growing 76% from 2012 to 2014.
Top concerns for impact investors today include climate change, gender equality, education, and agricultural sustainability, but below the surface, it seems that most of these investors are either consciously or unconsciously aiming to end global poverty. More importantly, today’s devotees argue that impact investments don’t mean sacrificing financial returns in an effort to do good, and toward that end they are investing in everything from private equity to exchange-traded funds. Some go even further, insisting that impact investments are, in fact, less volatile and outperform traditional financial benchmarks, especially in bear markets.
Of course, many eminent financiers are skeptical about the wisdom of trying to combine investment objectives with social causes. Venture capitalist Marc Andreessen, of Andreessen Horowitz, expressed this view best when he once said that impact investments are “like a houseboat. It’s not a great house and not a great boat.”
Perhaps so, but a survey conducted by U.S. Trust finds that roughly a third of high-net-worth investors either own or are interested in owning social-impact assets. The survey also notes that about 60% of millennial investors either own impact assets or have expressed interest in impact investing, versus 24% of baby boomers; it also says 40% of women are similarly intrigued, versus 26% of males.
And what the client wants, Wall Street procures. In April, private-equity firm Bain Capital hired former Massachusetts Gov. Deval Patrick to build the firm’s social-impact-investing business. Then, in July, Goldman Sachs acquired, for an undisclosed sum, Imprint Capital, a firm that creates bespoke impact portfolios for wealthy families. And in October, not to be outdone, BlackRock launched a targeted U.S. equity impact strategy, the BlackRock Impact U.S. Equity fund.
“We think we’re opening up the market in a way that hasn’t been available to retail investors,” says Deborah Winshel, head of impact investing at BlackRock.
It’s happening at all levels of the wealth management industry. Bank of America, for example, manages $9.8 billion in impact-investing-like assets, from green bond funds to socially responsible ETFs. Its private bank, U.S. Trust, has clients’ money invested in six internally managed public-equity impact strategies—such as a women’s and girls’ equality fund and a religious-values fund.
The fund minimums are a digestible $100,000 for an off-the-shelf option. For the more demanding impact investor willing to commit at least $3 million, U.S. Trust portfolio manager Jason Baron says a bespoke public-equity portfolio can be created. These funds seek to hug traditional and relevant financial benchmarks in the near term but outperform over longer stretches. That’s because studies, such as an audited financial analysis of San Francisco–based KL Felicitas family foundation’s impact portfolio, suggest that companies that obsessively take care of the environment or their employees tend to outperform more conventional firms over time.
What’s interesting to note here is that even Goldman Sachs now considers an impact-investing arm to be a vital part of its services to families. Advising the wealthy on their asset allocations is the bank’s bread and butter, explains Hugh Lawson, a managing director. “But if you said, ‘Tell me how I can better align my portfolio with my values,’ we didn’t have an answer. [Impact investing] sits right alongside those other capabilities that are core.”
So we’re entering a golden age for socially conscious capitalists, with more impact-investment options arriving daily. Investors need to take care, however, to ensure they understand these products and their nuances.
For some cautionary tales on what can go wrong, see “Impact Investing’s Dark Side,” below. In the meantime, to help our readers better understand how impact investing is done well, Barron’s Penta talked with three families committed to aligning their portfolios with their values.
Doug Spencer of Denver was at the helm of firearms manufacturer Cooper Arms in 1997 when he sold the business for an undisclosed sum. He was just 41 years old, and, like many young ex-CEOs who suddenly find themselves rich, Spencer wanted his next job to be a passion project. He had served as director of fund raising for Mile High United Way, managing its $30 million in annual community campaigns, but his interest in charitable fund raising quickly waned. “I realized that, while there is a role for philanthropy, it wasn’t going to solve most of the world’s pressing problems,” he says.
He has a point. To meet the United Nations’ Sustainable Development Goals for ending extreme global poverty by 2030, it is estimated that governments, businesses, and investors need to kick in $172.5 trillion to build out infrastructure, combat infectious diseases, and stop endemic hunger. And yet total philanthropy and government-assistance remittances flowing from developed to developing countries was $365 billion annually, by the U.N.’s last count.
In contrast, the McKinsey Global Institute puts global financial markets at $225 trillion. The gap speaks for itself. Spencer, now 59, and other like-minded impact investors believe, not unreasonably, that real solutions to the world’s endemic problems will ultimately come more from capital markets than from philanthropic giving.
But how? In 2005, Spencer was development director of Friendship Bridge, a microfinance nonprofit that provides loans to impoverished Guatemalan women. While Spencer was traveling in Guatemala, Hurricane Stan battered the country, causing an estimated $1 billion in damages as heavy rains triggered mudslides and buried entire villages. The death toll was estimated at 1,500. “We got to see firsthand the desperate situation for the poor,” Spencer says. The horrors he saw led to one of his first impact investments, a start-up called Empowering Business Latin America, which builds low-cost homes for the country’s poor.
Guatemala and neighboring El Salvador have a 1.9 million-unit housing deficit, Spencer says, pointing out the possibility of earning decent returns while also addressing a social need. But that initial investment also triggered some soul-searching within the family.
His wife, Kathleen, is a court-appointed special advocate for children, their youngest daughter is intensely interested in climate change, and their oldest daughter is an oncology nurse concerned with health care and aging.
The family quickly realized that the problems related to all of these issues disproportionately impact lower-income communities, Spencer says, and that was the thread running through all of their interests.
By 2012, they had developed a broad thesis for their impact portfolio—to combat global poverty through investments in economic empowerment and access to financial services, education, alternative energy, and environmental sustainability. “We like to say we’re not investing for the world of today but investing for the world that we hope for,” Spencer says.
Now the practical bit. That same year, Spencer went to an impactinvesting conference in San Francisco and there met Jonathan Firestein, head of private capital at Ascent Private Capital Management, a U.S. Bank unit for clients with $75 million or more in assets. “I was impressed with Ascent’s investment in capacity and resources,” Spencer says. At any one time, Ascent tracks about 800 impact funds, Firestein says, and managing a client’s impact portfolio is included in its annual fee. To tap a line of independent information in the field, Spencer also joined a peer-to-peer group called the 100% Impact Network, a global organization based in San Francisco that’s made up of 73 wealthy families collectively sitting on $4.5 billion in capital and committed to investing all of their wealth for impact.
Currently, 68% of the Spencers’ portfolio is invested with an eye on the larger world, and they’re gradually moving to their goal of 100%. You can see a more detailed snapshot of their portfolio in the chart, Spencer Family Portfolio.
Spencer has a nuanced approach, demanding market-rate returns with some investments and, with others, compromising on returns to boost social impact. His public-equity, fixed-income, and private-debt investments are earmarked for the best returns possible.
But for direct investments in companies such as Jibu, a potable-water distributor empowering local entrepreneurs in East Africa, he is more philosophical about how the investments play out.
“I always expect to get my money back, but understand that with direct investments, or venture-type funds in particular, I will win some and lose some,” Spencer says.
INVESTORS WHO DON’T BELIEVE that a portfolio aligned with a family’s values can possibly match the muscular returns of a traditional portfolio should talk with Wall Street veteran Ron Cordes. The executive, now 56, was heading up independent financial advisory AssetMark Investment Services in 2006 when he and his co-founders sold it for $230 million to Genworth Financial Wealth Management. Cordes says he decided to “dedicate the rest of my productive years to doing something good for the world.” And so the $10 million in assets Cordes Foundation was born, focused on alleviating poverty around the world.
Not so fast. Cordes quickly realized that giving away the small foundation’s 5% in federally mandated grants each year wouldn’t move the needle. “We’re not the Gates Foundation, so we can’t write a $10 million check every time we see a problem that we want to solve,” Cordes says.
What he needed to do, he realized, was mobilize his foundation’s entire balance sheet for its antipoverty mission. To build his impact portfolio, Cordes consulted with advisors at U.S. Trust, donor-advised fund ImpactAssets, and First Affirmative Financial Network, a Colorado Springs, Colo.–based advisory with $850 million in assets under management.
In 2007, in a first move, the Cordes Foundation decided to invest 20% of its endowment across a range of impact investments, mostly private-debt and private-equity funds. The Wall Street veteran invested in Katalysis Bootstrap, a Central American microfinance fund, and the Northern California Community Loan fund, which provides affordable-housing and economic-development loans to low-income communities. The foundation’s timing could not have been worse. Within the year, the financial crisis tore through the markets. “My thought was, ‘Well, let’s see how much we lose when everything gets marked to market at the end of the year,’ ” Cordes recalls.
At the end of 2009, however, Cordes was shocked to discover that his impact investments outperformed the rest of his portfolio. For example, private-debt microfinance investments in MicroVest and Finca, which make loans to financial institutions that focus on the poor, took no haircut and paid their 5% to 8% coupon rates throughout the crisis. “The subprime crisis and resulting fallout across developed markets did not spread to the far corners of the developing world, where microfinance institutions were making responsible loans,” Cordes says.
And so, “In the worst investing period of my professional lifetime, when everything else went down the same drain, we found this investment category that was largely immune from that.” Having stumbled across an asset class uncorrelated to the rest of the market, he doubled down, and in 2011, he went to the White House with a consortium of similarly minded impact investors to commit 100% of his foundation’s endowment to impact investments.
With the guidance of Cordes’ wife, Marty, and daughter Stephanie, many of the foundation’s investments to combat global poverty have targeted women-owned businesses, including a $50,000 direct investment in Soko, a Website that sources jewelry from developing-world artisans for sale in developed markets. Meanwhile, the foundation’s bespoke fixed-income portfolio through Breckinridge, called Sustainable Taxable Bond Strategy, uses 16 different gender-equality metrics to find related investments in government, sovereign, and green bonds.
Cordes’ portfolio performed well in a bear market, but how, we pressed, did his portfolio perform during the recent bull run? Cordes says the portfolio is not constructed to be a “concessionary” trade-off between financial return and impact. He claims that his private debt has “stacked up well against traditional alternatives.”
Private equity is longer-looking, however, with capital still being deployed, so the jury is still out, but there has been “no unexpected negative performance,” he says. And his early returns in public equity, which was fully invested by August 2014, beat by 1% its benchmark, a 70/30 blend of the Standard & Poor’s 500 and MSCI ex-U.S. and Canada. Taken together, Cordes says, the target for the overall portfolio is an 8% return annually. Not bad, considering it also has a seemingly effective bear-market hedge built into that return.
IN 1997, KEVIN AND JENNIFER TRAPANI founded the Redwoods Group, a North Carolina–based insurance company. It was one of the first certified B Corps—companies that an independent rating system has deemed to be working to solve social or environmental problems. To earn that B Corp star, the Redwoods Group became the low-cost insurance provider to underserved institutions like YMCAs, Jewish Community Centers, and camps for kids. Kevin didn’t feel any tension running his company that way. “Profit isn’t a swearword—it’s actually an important measure of sustainability,” he says.
All of their hard work paid off when the couple sold Redwoods for $20 million earlier this year. With their windfall, they set out to build an impact portfolio, and their Morgan Stanley advisor, Joseph Eisler, introduced them to Aperio Group, a Sausalito, Calif.–based company that creates customized impact portfolios in public equities. The firm’s clients must commit at least $1 million to an Aperio impact portfolio, and it charges a 0.40% annual fee.
The process began with a questionnaire. “Essentially, Aperio talked to us about what made us cringe, and let our moral compass guide us,” Jennifer says. The Trapanis wanted a bespoke portfolio, which Aperio will build for an account of at least $5 million. And they wanted it to be “animal friendly,” as well as reflect other deeply held values.
Investors are allowed to choose from a menu of nine preconfigured strategies, such as the “animal friendly” option, which excludes companies known to have inhumane practices like factory farms and certain types of animal testing. Its “environmental impact (10% tilt)” option is a portfolio that strips out polluters and overweights companies deriving at least 10% of their revenue from alternative energy, energy efficiency, green building, pollution prevention, or sustainable water. From there, clients have the possibility of excluding from their portfolio whole industries or individual companies.
Along the way, the Trapanis got a reality check. For their bespoke public-equity portfolio, they wanted no part of companies using factory farming, and they found alcohol producers, the gambling industry, and gun manufacturers to be morally objectionable. But they quickly discovered that being too pure could negatively impact returns. “Zero exposure to gaming cut out a lot of companies that were performing well and turned out to be pretty responsible,” Kevin says. In the end, the couple decided to tolerate companies with 5% or less of their total revenue in gaming.
For fixed income, they chose the Breckinridge Intermediate Term Muni fund, a tax-efficient bond strategy that evaluates the environmental and social purpose of a bond, charging 0.15% in fees annually. Community Capital’s CRA Qualified Investment, another holding, is a market-rate bond fund, investing in high-credit-quality U.S. bonds for everything from small-business loans to home mortgages for low-income families. It charges a net fee of 0.48%.
“We aren’t wearing tie-dye, Birkenstocks, and eating granola,” Kevin says, but the Trapanis do want to “reward good actors with low-cost capital and starve the bad actors. That’s going to change the way business behaves.”
Some might argue that the Trapanis are simply passively screening sin stocks, a service that has been around for decades, and that they’re not real impact investors using their portfolio to change behavior and improve the world as they see it. But, for one, their impact portfolio is transitional. A mere seven months after they sold the Redwoods Group, Kevin and Jennifer are still deciding how much of their money will go to charity and how the rest might be deployed for more active-impact bets. All, ultimately, will benefit their 14-year-old twins and 30-year-old daughter and her husband.
More important, we think such criticism rather misses the point—which is that the line between investing and do-good works, between impact investing and passive screening, is starting to blur.
The World Economic Forum narrowly defines impact investing and figures that, by its definition, it is less than a $40 billion industry. But consider the California Public Employees’ Retirement System, or Calpers, which alone manages $305 billion in assets. Calpers is making all of its internal and external asset managers articulate precisely how they are incorporating environmental, social, and governance risks into their investment process, while using its financial muscle and voting rights to force oil companies, for example, to slowly shift their businesses toward a low-carbon economy. That looks a lot like impact investing to us, even if Calpers’ huge portfolio isn’t officially characterized as such.
It’s the 21st century, and the fast-growing field of impact investing can’t be contained by any one tidy definition. That’s because the “impact” parameters of each portfolio are defined anew by every family or institution, according to their values and worldview, and that makes it a shape-shifting beast.
But its mercurial nature is precisely why impact investing is a force to reckon with—and here to stay.
IMPACT INVESTING'S DARK SIDE
Dubious marketing claims are a growing part of the impact-investing business. Consider the $94 million municipal “green bond” floated in 2015 by the Massachusetts State College Building Authority. The funds are earmarked to build a 725-space parking garage at Salem State University outside of Boston. The building will meet minimum LEED-certified (leadership in energy and environmental design) standards and offer a few electric-car charging stations. But it’s really a standard-issue garage, and one industry watchdog called the bond “pathetic” and “not good enough” to qualify as a green bond.
Here’s what you need to know: There are no required rules about what is or isn’t a green bond, and municipal-bond issuers don’t have to disclose the “use of proceeds” at issuance. In fact, they sometimes take a year or more to come clean. “There is a quiet movement among municipal investors to urge transparency,” says Matthew Weatherley-White, managing director at the Caprock Group. In the meantime, he says, impact investors should consider building a bond portfolio entirely of secondary-market securities, which allow “for a high level of confidence” as to use of proceeds.
Transparency is just one issue that needs to get tackled if the impact-investing industry is to mature further. Impact-industry tracker US SIF surveyed 16 fund managers with more than $3 trillion in environmental, social, and governance fund assets. It found that 62% of those assets were in underlying funds that did not even disclose how ESG issues factored into their investment process.
The $290 million F.B. Heron Foundation in New York City experienced a severe shock when it decided to analyze its portfolio in 2013. The foundation’s mission is to “help people and communities help themselves out of poverty”; it currrently has 66% of its endowment invested to fulfill that mission. Back in 2013, F.B. Heron wanted to get a clearer picture of how it was doing.
The foundation looked at its largest company holdings, ranked by the number of employees. No. 1 among its holdings in its passively managed index fund was Wal-Mart Stores, a firm that has been severely criticized in some circles for underpaying its workers and creating an army of the working poor. In the foundation’s real estate investment trust portfolio, meanwhile, it appeared as though Corrections Corp. of America was booking both guards and prisoners as employees. F.B. Heron President Clara Miller hit the roof.
“It was a cringe-worthy moment, but a necessary learning experience,” she says. Wal-Mart, Corrections Corp., and some of the foundation’s largest bank holdings were jettisoned from its portfolio. That bank exposure has been partially replaced by the SFRE Sapphire fund, which invests in “sustainable financial institutions” supporting low-income, underserved communities.
The lessons from all of this: Don’t blindly buy into “green” or “social impact” labels. Ask pointed questions and know exactly what you own.