Making an impact with assets
Asset investment and philanthropy are based on different logics. In one sense, expectations of return, in the other, expectations of societal impact. How can they be reconciled?
“My foundation has only small assets. When it comes to investing, what matters most to me is long-term security, low costs and distributions that can be planned, so that I always have enough funds available for the foundation’s work.”
“I want my money to be effective whilst I invest it. On the one hand, I invest the assets of my foundation in a particularly sustainable way. Secondly, I invest directly in some social businesses that don’t make much profit but offer solutions to important problems.”
Traditionally, the worlds of asset management and philanthropy follow different logics: asset management focuses on the relationship between risk and return. Philanthropy is about social impact.
Many philanthropists now think of the two worlds together: they pay special attention to the social impact, positive or negative, of their investment decisions. Concurrently, they consider how they can increase the impact of their philanthropic commitment through targeted investments of their foundation’s assets.
Anyone considering impact investing will initially be overwhelmed by a multitude of concepts and acronyms. Ultimately, it is always a question of classifying a form of investment or a specific investment according to two aspects: economic performance on the one hand, social impact on the other.
One difficulty is that there are no clear criteria for which investment is “right” for the philanthropist or foundation.
Criteria for economic performance
Whether an investment is suitable can only be judged in comparison to the funder’s investment objective. Traditionally, most foundations want low risk, low cost and predictable distributions. Other foundations attach more importance to a long-term increase in value and accept higher risks for this and also considerable fluctuations in value in the short-term.
With the help of indicators for short- and long-term returns, risk and volatility, asset managers try to select suitable forms of investment. It should not be forgotten that every investment remains a bet on an uncertain future; data from the past provides clues, but even fixed-income securities from an issuer with a good credit rating can turn out to be risky if the economic situation changes.
Criteria for social impact
To describe the expected social impact of an investment, there are no established categories such as risk and volatility. It is true that investments according to environmental, social and governance (ESG) criteria or even impact investing products are offered everywhere. However, this entire market is still in an early phase, even if the marketing suggests otherwise.
Many assessments are based on unclear or proprietary criteria, or are limited to a “best-in-class” approach in which similar companies are compared with each other. Some only assess whether ESG risks can negatively impact the company’s bottom line; such a rating says nothing about a company’s positive contribution to society.
Although the market for investment products advertised as “Impact Investing”, “Socially Responsible Investing” or similar terms has exploded in recent years, in the economy as a whole we are seeing only the initial signs of a transformation of the economy towards more sustainability, reduction of emissions and less consumption of resources.
Even more than in the case of economic performance, the assessment of the expected impact depends on having one’s own goals clearly defined. Should the companies in which investments are ultimately made only do as little harm as possible? What do we then consider in terms of peer grouping; other companies in the same sector (the “better” oil company – or the more sustainable energy producer?) Should certain industries not even be considered (such as producers of landmines or operators of coal mines)? Or are positive social contributions expected from the business activity, such as investments in clean mobility, the provision of social services, innovative business models, fair working conditions or employee participation models?
“I have dealt with various asset managers. I don’t have the capacity to deal with asset management in detail. As a simple solution, I have decided, for the time being, to invest in special funds for foundations, which take ESG criteria into account, but which are primarily geared towards low fluctuations in value and regular distributions.”
“I have developed investment guidelines for the liquid foundation assets with the help of advisors. In doing so, I focus on the market leaders of sustainable industries of the future, such as e-mobility, renewable energies or environmentally compatible food security. In doing so, I also accept some risks and initially lower returns. I am also experimenting with direct investments in social businesses.”
Investing in impact – and earning money alongside?
Some philanthropists wonder whether it is even possible to invest in impact and earn a financial return at the same time. Others even question pursuing these two goals simultaneously on moral grounds – is it ethically right to make money from a socially relevant cause such as health, poverty alleviation, clean water or education?
This question is not easy to answer; and certainly not definitive. In a market economy, social goods and services of all kinds are only provided directly by state institutions, for example in the areas of education or security. Whether food or medicine, services such as care and trade, infrastructure of schools and roads, companies become active participants.
Their logic is that they must at least cover their costs with their economic activity; including the costs of capital (i.e. the returns of shareholders and investors) and the payment of employees. Profits allow companies to grow and continue to exist even in difficult situations. With their economic activity, companies always generate effects of various kinds; they consume resources, they pay wages and salaries, they produce useful or dangerous goods, they pay taxes and duties, they invent business models and products. There are very few companies that stand out as particularly sustainable and fair in every respect.
When it comes to asset investment, there can be obvious contradictions – for example, when foundations earn returns by investing in shares of fossil energy companies, which they then invest in climate protection projects. When it comes to investing, foundations and philanthropists cannot avoid the question of impact. As long as the market does not offer conclusive answers, it remains a difficult task to get it right. In practice, most foundations work within investment guidelines that are regularly reviewed and adapted to market developments and changing social perceptions.
