Published March 13, 2019 in The Chronicle of Philanthropy

Rebutting the Case Against Impact Investing

To the Editor

Thanks to Larry Kramer for his critique of impact investing, as it will certainly make the field stronger (“Hewlett Foundation’s Leader Makes a Case Against Impact Investing“).

His comments are worth our collective time, and his willingness to listen to all arguments makes his positive intentions clear. An enthusiastic skeptic is helpful to unabashedly optimistic people like me. We need serious pragmatists to make this work even better. (The Hewlett Foundation is a financial supporter of the Chronicle of Philanthropy.)

I would share my belief that three of the elements at the core of Mr. Kramer’s assertions underpin the very reasons why impact investing is a critical evolution of investing generally.

First, he touches on the basis of what I believe is a true misunderstanding throughout the for-profit and for-impact (what some call nonprofit) sectors — that if an opportunity has a market rate of return, money will flow to it. In my view, this is overly general and perhaps only partially true. Not all market rate opportunities are fully funded — and that is surely true for opportunities that are not on the public exchanges — as is the case with many private opportunities, such as mission-related deals.

This point relies on a mostly debunked mythology that the market is a perfect machine. It is not. Some scholars have suggested it is closer to a garden that favors certain areas and neglects others regardless of return. We only need to look at the middle-market challenges to see this play out.

The second element I would touch on is one Mr. Kramer has asserted in other venues — that the opportunity cost between “neutral” investments and impact investments may be considerable.

I am grateful he makes clear we don’t have enough longitudinal data to prove that one way or the other ­— although some would debate that point.

My additive point to his is that making sure your investments are at least neutral to impact (I’ll define that as not negatively impacting the environment or our social fabric) is an achievement in and of itself, that takes a great deal of intention and effort. If Mr. Kramer defines impact-neutral investing as investing for maximum return regardless of impact (positive or negative), then my point is certainly counter to his.

Evidence the many human-trafficking and child-labor stock screens that turn up egregious harm even in companies we utilize frequently and invest in via simple indexes and mutual funds.

Mr. Kramer also shares his view that impact investing will not change markets. I appreciate the mathematical argument that all the foundation assets in the world, even if aligned on principles, might not change the behavior of a fund executive with hundreds of billions under management or truly move the needle in a market worth trillions.

However, what if people begin to read our 990s — and not the section most read to understand how much we grant each year and how much our top executives are paid — but the investment section? And suppose they research what funds foundations invest in and how those funds might be involved in some of the issues our grants try to alleviate? Or what if people use their influence and ownership of shares to speak to management about their practices and how they need to change to reflect a just society?

For example, suppose a foundation focused on fair housing practices finds the distressed-credit asset fund it’s invested in is foreclosing on homes in a predatory manner, taking advantage of the gray space between public policy and ethics? And suppose that foundation demands an explanation. Do you think the investment manager might think twice before investing that way in the future? If they want to keep that client, they might.

Markets move every day simply on emotion. Let’s work together to move them with our intentional actions instead of believing there is nothing to be done.

Lastly, I would add that all investing should be focused on including the full costs (positive or negative) of impact. If an enterprise is extracting private value from the market and in doing so creates public harm that we all pay for, this is certainly something we should be working to correct.

Let’s hope these conversations lead us to a more mature form of capitalism that rewards creating value in an investment via financial performance and measurable social or environmental impact.

Doug Stewart
Executive Director
Max M. and Marjorie S. Fisher Foundation

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