Field Notes: The Thorny Complexities of Impact Investing

Two articles in the Stanford Social Innovation Review delve into the difficulties of impact investing and why the traditional investment structure remains an obstacle.

In the Stanford Social Innovation Review, Mission Point’s Adam Rein recently detailed some inherent problems and potential solutions concerning impact investing. Rein bases his case on a recent gathering of the 100% IMPACT Network. The organization, a subset of impact investing network Toniic that’s made up of family offices, foundations, and persons who commit 100 percent of their assets to positive impact, strives to “align moral values with money management strategy.”

How does this work? If an investor cares about poverty, she funds a business that provides affordable health services to low-income communities…Yet in reality, the vast majority of investments seeking impact fail to achieve both intent and outcomes, leaving the 100% Network and others scratching their heads over how to achieve their goals.

The article states that this disparity results from the fact that impact investors keep the majority of their assets in diversified funds:

Aside from some exceptions in microfinance and affordable housing, diversified funds have limited ability to demonstrate measurable outcomes. Trillions of dollars of sustainable investments have not stopped weapons and tobacco companies from rapidly growing, and selling stock in Anheuser-Busch and Phillip Morris to buy Apple and P&G doesn’t measurably change outcomes the next day. The high bar to becoming an impact investment has forced most assets into funds that actually may not be improving the world.

The article goes on to cite four structural factors that prevent impact funds from altering the cost of capital:

First, they diversify among many large companies, resulting in weak leverage on any one. Second, bad companies often generate large cash flows to fuel their own growth, limiting investor influence. Third, selling company stock puts downward pressure on its valuation; this incentivizes profit-driven investors to increase their holdings to arbitrage the mispriced asset, rebalancing the cost of capital. Finally, impact is in the eye of the beholder, as many investors realize after learning that many impact funds own large positions in Coca-Cola or PepsiCo. Any company will fit the values of a subset of impact investors—for example, local communities often laud coal companies for job creation and affordable energy despite the loud protests of environmentalists.

The authors offered this rubric to guide investors toward a solution:


Meanwhile, Heron’s Clara Miller and Toni Johnson tackle the complexity of mission-aligned investing in a new article in the Stanford Social Innovation Review:

On the surface, investing with one’s values may seem simple, but our experience at the F.B. Heron Foundation shows that even with the best of intentions and promising, emerging standards and tools, the current investment framework makes it challenging.

The authors cite three main reasons why divesting from non-mission aligned companies is so difficult:

  • Delegation of investment authority
  • Fund structure
  • Lack of standardized data

While Heron continues to work towards investing all of our assets for mission, we understand that there must be a process of optimization. As we have learned over time, some impact metrics can be misleading and not every metric you hope to find is available across asset classes. We hope that in the future this process will become more mainstream among investors and the availability of products and information will improve.


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