Impact Investing: The Only Sustainable “Values-Based” Investing

As COVID-19 sweeps through the world, the most important area to reflect upon is: How do we move forward?

It is safe to say that traditional investment strategies aren’t holding their own against an external perpetrator such as a pandemic sweeping across the globe. The markets have crashed and burnt spectacularly after the longest bull run in history.

If the definition of sustainable is to endure, how can we — with a straight face — call over 60% of current investment portfolios “sustainable?” What value system are we basing financial investment decisions on, if any?

As COVID-19 sweeps through the world, the most important area to reflect upon is: How do we move forward?

COVID-19 is the antidote to the various viruses that have expressed themselves in humans for centuries: selfishness, greed, and attachment, just to name a few. The only way out is to fundamentally change our behavior.

Nature meticulously protects all species other than humans. Other species have specific eating patterns, organizational structures, mating habits, and habitats. You will not find a herd of tigers grazing by a riverbank no matter how hungry they are!

Humans are not automatically protected by nature. They are equipped with “intellect,” which allows them to make choices. Only humans have choices. The choices a human makes today will have an impact on the world we live in tomorrow. In other words, the actions of our past form our present, and our present actions will determine our future.

So how do we embed values into our investment decisions to reduce negative externalities and possibly show better resistance during times of crisis?

Most people inherently want to “do good,” which happens to be the main driving force behind the impact investment movement. Well-intended investors, however, often lack reliable data sources, suitable investment products, and are blocked by mental and traditional obstacles that can delay the mobilization of capital to achieve deep impact. It is important that they do not succumb to herd mentality and blindly follow the latest trend.

They should not take anything for granted and question everything. This is the key to developing the intellect in order to make sound impact investment choices.

In order for any investment to stand a chance of having an impact, an investor needs to have a well-articulated intent; a desire to see impact delivered as the imperative to the investment strategy. Further, the investee will need the ability to track and deliver the desired impact outcomes. Ultimately, not a single investment in the future will escape an impact assessment and will be priced according to the relative impact they deliver from negative to neutral, light to deep. “Deep” impact investing provides the highest contribution to society or the environment.

It is too early to tell whether current impact investment strategies fare better in times of crisis like this. The first true impact portfolio — the KL Felicitas investment portfolio — tracked since 2008, shows equal financial performance but lower volatility than mainstream investment portfolios over the last twelve years. More widely adopted Environmental, Social, and Governance (ESG) or “sustainable” investing strategies emerged as repackaged traditional capital markets portfolios. They are generally highly correlated to mainstream markets, have zero additionality, and are better disregarded as a form of impact investment.

Greater awareness of what is required to provide the basic services to all people on the planet is what guides impact investors to allocate capital. The specific development milestones are well documented in the UN Sustainable Development Goals (SDGs) framework.

What can all (impact) investors do to improve the impact outcomes of their investments?

• Do their homework. Equip themselves with an understanding of impact frameworks such as the SDGs, the Impact Management Project (IMP), review case studies, and gather reliable impact data from whichever sources they have available.
• A realistic assessment of “appropriate” or “total” return. We can now all agree that the concept of “market returns” is nearly farcical. Markets have dropped to historical lows in the past three months. And further, as evident now, no one has ever calculated nor included the environmental and societal “costs” to achieve these so-called “market returns.”
• Track the granular impact output data. The technology exists and has been in commercial use for years tracking various activities.
• Using (smart) contracts in the investment product gives investors the flexibility to invest more or less based on (impact) milestones achieved. They can also embed granular impact data to set costs of capital and pricing dependent on the impact achieved and therefore real value unlocked.

In a similar vein, intelligent giving (smart donations) requires an objective thought process that assesses needs, the most appropriate interventions to meet them, and an evaluation of the relative success of the interventions at the time — not two years in retrospect. This goes far beyond the standard application of “charity” which has the connotation of merely giving away money to feel better about oneself.

“Ironically the least selfish thing to do right now is spending the time to become the best human you can be, making higher-value choices for a truly sustainable future.”

For any individual to have the clarity of thought and consistency of action to drive intelligent investing or giving, the place to begin is with developing themselves. Ironically the least selfish thing to do right now is spending the time to become the best human you can be, making higher-value choices for a truly sustainable future.

Fleur Heyns is a serial entrepreneur and impact investor, co-founder of Proof and student of Vedanta.

Looking to make a difference in the fight against COVID-19 or build a comprehensive corporate sustainability program? Whether you’re an investor, corporation or individual, you can directly fund, measure and visualize verified impact today. Visit Proof to learn more.